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Put-call ratio and max pain, explained
Two numbers are quoted from the option chain every day: the put-call ratio and max pain. Both come from open interest. Neither means what it is most often said to mean.
Open interest first
Open interest is the number of option contracts that are open: bought by one party, sold by another, and not yet closed. It is counted per strike and per expiry.
The point that is most often missed: every contract has a buyer and a seller. Open interest tells you how many contracts exist at a strike. It does not tell you who is right.
The put-call ratio
The put-call ratio (PCR) divides the open interest in puts by the open interest in calls, for one expiry. A PCR of 1.2 means 120 puts are open for every 100 calls.
There is a second version, by the day's traded volume instead of open interest. The open-interest version is the one usually meant.
Its reading depends on whose side you take. The common retail reading is that many puts mean many people fear a fall. The reading used by desks that sell options is the opposite: heavy put open interest is support that has been written, so a high PCR is supportive.
Reading the chain as a seller
Large participants mostly sell options and collect the premium. On that view:
- a strike with heavy call open interest is a level sellers expect Nifty to stay below: resistance, sometimes called the call wall;
- a strike with heavy put open interest is a level they expect it to stay above: support, the put wall;
- calls added today strengthen resistance and puts added strengthen support; either being closed weakens it.
It is an assumption, and should be tested like any other.
Max pain
Max pain is the expiry level at which option buyers as a group would lose the most, and sellers pay out the least.
To find it, take each strike in turn as the closing price, add up what every open call and put would be worth there, and pick the strike with the smallest total.
The theory is that prices drift towards max pain as expiry nears, because sellers have the means and the motive to defend it. It is a neat story.
Does max pain work? checks it against hundreds of Nifty expiries.
Where to see them
Nifty PCR and max pain today shows both for the nearest and the monthly expiry, with open interest by strike. They are end-of-day figures from NSE's bhavcopy.
Questions people ask
What is a good PCR ratio?
There is no fixed good level. Compare today's PCR with its own history at the same distance from expiry, and remember that a high reading can be read as supportive or as fearful.
How is max pain calculated?
For each strike, sum the value of all open calls and puts if the index expired there. The strike with the lowest total is max pain.
Is PCR above 1 bullish?
Option sellers read it as supportive, because more puts than calls have been written. It is a lean, not a signal, and has to be judged against the record.
Do PCR and max pain work for Bank Nifty and stocks?
The definitions are the same for any underlying. How well they describe the outcome differs, and thinly traded chains are less reliable.
Keep reading
Research and information, not investment advice. Historical patterns describe the past and do not promise returns.