Put-Call Open Interest Analysis
An analytical framework that uses the ratio and distribution of open interest between put and call options across strikes to infer the positioning and sentiment of option writers, commonly applied to Nifty and Bank Nifty chains.
The put-call open interest ratio (PCR-OI) was calculated by dividing total put open interest by total call open interest across all strikes and expiries for a given index. A PCR-OI above 1.0 indicated that more put contracts were open than call contracts, historically associated with a market that had absorbed substantial protective put buying — which, from a contrarian perspective, sometimes preceded a market recovery. A very low PCR-OI suggested call accumulation, historically associated with complacency or bullish positioning.
However, practitioners refined this further by distinguishing between put buying (typically by portfolio hedgers) and put writing (typically by income-seeking sellers). Raw OI could reflect either, making interpretation nuanced. Rising put OI with falling put premiums indicated net put writing, a fundamentally different signal than rising put OI with rising put premiums (net put buying).
Strike-level OI analysis was more granular and widely used in Indian markets. Participants mapped the OI distribution across strikes to identify the max pain level — the strike at which the net payoff to all option buyers was minimised on expiry. The hypothesis was that market makers with large short option books had an incentive for the market to settle near max pain, though empirical evidence from Indian markets showed this was a tendency, not a reliable prediction.
Change in OI throughout the trading day was tracked as a real-time sentiment indicator. In Bank Nifty, shifts in the OI concentration — such as rapid unwinding of puts at a key strike — historically preceded directional moves as the market cleared away the support level implied by that put OI concentration.
PCR analysis was most informative when used at extremes. Historically, when PCR-OI exceeded 1.5 or fell below 0.7 in Nifty, the market often reversed from short-term directional trends, though the timing of such reversals was variable and could not be mechanically traded without additional confirmation.