Put Call ratio is calculated by taking the ratio of put volume traded to the call volume traded. Put Call Ratio is design to measure the overall performance of a market. It works in contrary to the market. If Put call ratio increases it means investor forms a bearish view on the market. It means investor has taken more put option rather Call Option. Likewise, when this ratio decreases it means investor forms a bullish view on the market. It means investor has taken more call option rather than taking put option.
This is because formula takes into its denominator call volume. When call volume decreases, ratio increases resulting into bearish view by investors likewise when call volume increases, ratio decreases resulting into bullish view by investor. Formula for computation of Put Call ratio is given below:
Put Call Ratio = Put Volume/Call Volume