How FII/DII Data Impacts Put Call Ratio Readings

Institutional flows from foreign and domestic players often shape market sentiment in a subtle yet powerful way. One area where these flows intersect meaningfully is the Put-Call Ratio (PCR) — a popular options indicator used to gauge market mood. In this article, we explore how FII (Foreign Institutional Investors) and DII (Domestic Institutional Investors) actions influence PCR readings, and how you can interpret those signals for trading.

What Are FII and DII?

• FII (Foreign Institutional Investors): These are institutional investors based outside the country, such as mutual funds, hedge funds, pension funds, etc., investing in the domestic equities and derivatives markets.

• DII (Domestic Institutional Investors): These include domestic mutual funds, insurance companies, pension funds, banks, and other local institutional entities.

FII and DII data are frequently tracked in terms of net purchase or sale (in cash, futures, or options segments) to understand where the big money is moving on any given day.

Understanding Put-Call Ratio (PCR)

The Put-Call Ratio is a measure comparing the volume or open interest in put options versus call options. It can be calculated in two common ways:

• PCR (Open Interest):
  PCR=Total Put Open Interest / Total Call Open Interest​

• PCR (Volume):
  PCR=Put Options Volume / Call Options Volume​

Why FII/DII Activity Matters for PCR

Here’s how the flows of institutional investors (FII and DII) can sway PCR and market interpretation:

1. Directional Bias from Institutional Trades

• When FIIs buy aggressively in equities or call options, it can drive bullish sentiment, pushing more call activity and thus lowering PCR.

• Conversely, if FIIs or DIIs initiate selling or hedging via put options, you may see rising PCR, signaling increasing negative bias.

2. Hedging Behavior in Derivatives

Institutions often hedge their large directional exposures using options. For example:

• A portfolio underweight on equities might lead to increased put-buying to protect downside — pushing PCR higher.

• A bullish view could be supported by writing puts or calling calls, which modifies the open interest and volumes influencing PCR.

3. Overriding Retail Activity

Retail traders often crowd into options trades and distort PCR readings. But when FII or DII flows dominate, their trades can override retail noise and give more meaningful PCR signals.

4. Extremes & Reversion Signals

When institutional flows push PCR to extreme levels (very high or low), it might indicate overbought or oversold extremes. Since institutions often act with more insight and liquidity, extreme PCR driven by them can precede reversals.

How to Use FII/DII + PCR Together

Here are actionable steps you can consider:

• Track FII/DII Net Flows: Look at daily net purchase/sell data in cash, F&O, and options segments.

• Watch PCR Movements: Monitor whether PCR is rising or falling in alignment with institutional flows.

• Seek Confirmation: When institutional net flows show heavy buying while PCR is low, that’s a reinforcing bullish signal. If flows are selling and PCR is high, that's a reinforcing bearish signal.

• Be Wary of Contradictions: If FIIs are buying but PCR is exploding higher, it may suggest institutional hedging or retail panic, not pure direction.

• Use with Other Indicators: Combine with volume, trend lines, volatility indices (e.g., VIX) for stronger confirmation.

Example Scenario

Suppose on a particular trading day:

• FIIs show a net large purchase of equities and call options

• DIIs remain neutral

• PCR falls from 1.2 → 0.8

This alignment suggests institutional optimism that is reducing bearish hedges (thus fewer puts relative to calls). In such a scenario, PCR’s decline supports a bullish view.

On the flip side, if FIIs initiate heavy selling or hedging, and PCR rises sharply (say from 0.7 → 1.3), that may hint at institutional caution or reversal.