Learn With ETMarkets: Options demystified 401 – Market sentiment

Market sentiment derived from options can be assessed using the Put-Call Ratio (PCR). There are two types of PCR: volume-based and open interest-based. The volume-based PCR provides short-term analysis, while the open interest-based PCR gives longer-term insights. Traders use the PCR as a contrarian indicator, with a ratio above 1 suggesting bearish sentiment and a ratio below 1 suggesting bullish sentiment. The Option Chain is another tool that traders use to gauge market sentiment by analyzing factors such as open interest, volume, bid-ask spread, and implied volatility. The Max Pain theory suggests that the price of the underlying asset tends to settle near the option strike price where option writers minimize their financial gain.