OIPCR can be used to determine market sentiment—if it is greater than 1, it is considered bullish, and if it is lower than 1, it is considered bearish. Its utility, however, goes beyond this simple interpretation, read on
Shubham Agarwal
February 11, 2023 / 10:41 AM IST
We all believe in the power of market forces. These are created by the consensus of either buyers or sellers, leading to an imbalance in the market sentiment, which results in excessive pressure. Such a price action can result in a windfall for those on the correct side or huge losses for those caught on the wrong side.
We look at how to detect this consensus in a market that is volatile and take appropriate action to prevent losses even if windfall gains are not possible.
Gross consensus is created by extreme sentiment, which can be detected by closely analysing the market data. As participants, we often gauge our consensus expectations by looking at aggregate positions, particularly in the futures and options market. For example, if we observe consecutive days of price increase accompanied by a rise in open interest, we can conclude that the consensus is bullish.
The Open Interest Put-Call Ratio (OIPCR) is a sentiment indicator that helps in determining consensus. The calculation of OIPCR is straightforward.
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