Derivative Indicators



A derivative is a financial security that has a value that based upon or derived from, an underlying asset or group of assets. The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest rates, and market indexes.

In practice, while trading in derivatives there are quite a few indicators that we can look at and automate to produce trading signals when the rules we specify are triggered. Some indicators are more suited for trending markets while other indicators are oriented towards consolidating markets. Derivative indicators help you understand the direction in which the market and individual stocks are likely to move in the short term. The prices in the derivatives market is closely related to the prices in the equity market. You essentially bet on the near-term future of the stock market. Usually, experts and professional traders are the players in the derivative market who relatively have more knowledge about the stock markets than the normal traders.

There are three publicly-available market indicators you can use:


  • Put-Call Ratio:

This is a useful indicator to gauge the market sentiment and is calculated by dividing the volume of all puts traded on a given day by the volume of calls traded on that day. Put-call ratio is one such indicator of market sentiment. A 'Put' contract is one where you agree to sell an asset in the future, while a 'Call' contract allows you to buy at a fixed rate in the future. The put-call ratio is calculated by dividing the number of put contracts being trader in the derivatives market by the total quantity of call contracts.

A rising put-call ratio indicates that investors are putting more money into put options as compared to call options. Higher the number, greater are the chances of selling in the future. This may lead to a fall in stock prices. If the put-call ratio is extremely high, the traders will see a buying opportunity since it’s expected that the stock has bottomed out.

A declining put-call ratio indicates bullishness in the counter. An extremely low put-call ratio will make the traders see a selling opportunity as it is believed that the price has risen.

If the PCR value is above 1, One can look for reversals and expect the markets to go up.

If PCR PCR value is around 0.5 and below, one can expect the markets to go down.

Any number less than '1' indicates that there are more buyers in the market. This indicates a positive sentiment. Values between 0.5 and 1 can be attributed to regular trading

  • VIX:

If you are familiar trading in the futures and options space, you would have come across the term VIX. When the stock market rises and falls continuously over a sustained period of time, it is called a "volatile" market. Volatility also indicates when a market or security is unpredictable, or if there are any sharp price movements. It is important to understand its causes and various metrics to measure volatility like Beta and VIX as the correct use of volatility can also provide potential investment opportunities and help generate better long-term returns.

The volatility index, or VIX, is one of the most common barometers of market sentiment. For traders, the VIX not only represents as a useful tool for assessing risk, but also an opportunity to capitalise on volatility itself. VIX, is a real-time market index that measures the market's expectations for volatility in short term. Investors use the VIX to measure the level of risk, fear, or stress in the market when making investment decisions. Like you trade index futures and stock futures and options, you can also trade futures on the NSE VIX contracts. The National Stock Exchange's VIX India index measures the volatility in the stock market. VIX can be calculated on the basis of the prices of Nifty Options contracts in the derivatives market. This is because, the VIX shoots up during periods of uncertainty and fear. It indicates an increase in risk. Usually, a rise in the VIX is followed by a fall in the market.

If the VIX is high, it's time to buy and that the market participants are too bearish and implied volatility has reached capacity and vice versa. In simple terms, a higher level of VIX represents a high level of fear in the market and a low level of VIX indicates a high level of confidence in the markets.


  • DMAs:

Whenever you watch the stock market moving, we come across term like DMA or day moving average. Since daily fluctuation in market are difficult to analyse, traders look for patterns by using moving averages. Sometimes, some news may make the market move drastically in a single day and fluctuations thereby. This can be identified and easily monitored using a patterned index called the daily moving averages or DMAs. Usually, analysts use the 200-day moving average - the mean price of a stock or index over 200 days since this average takes into account the values over a long term of 200 days. This establishes the long-term trend. Unless there are new factors that may affect the stock or market significantly, the trend usually continues for a period of time.


Derivatives analysis can focus on two different types of analysis; fundamental analysis and technical analysis. And to make decisions about where and when to take a position, investors, traders and analysts use these two different approaches among which technical analysis includes knowing and using indicators. These three main indicators that a trader will any day need to effectively measure the market conditions based on any parameter like volatility, demand, and supply etc.

In utilizing derivative analysis, a skilled trader will hands down use these indicators to find the right opportunity and structure the most profitable event to trade and take advantage of it.

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