Understanding the Difference Between the Standard and Weighted Put-Call Ratio

By Lawrence G. McMillan

The put-call ratio is a widely used sentiment indicator in options trading, helping investors gauge market positioning by comparing the volume of put options traded to call options. However, there are two primary ways to calculate this ratio: the standard put-call ratio and the dollar-weighted put-call ratio. Understanding their differences can provide deeper insight into market behavior.

The standard put-call ratio is calculated simply by dividing the number of puts traded by the number of calls traded. This ratio is often smoothed using a moving average—such as the 21-day average—to identify trends. When the ratio is high, it suggests bearish sentiment, while a low ratio indicates bullish sentiment.

On the other hand, the dollar-weighted put-call ratio incorporates not only the volume of trades but also the price of the options. By multiplying the volume by the price of each option, this ratio accounts for the total money being spent on puts versus calls. This distinction is crucial because a trader hedging a position may buy low-cost, out-of-the-money puts, whereas a speculator with a strong bearish outlook may buy more expensive at-the-money or in-the-money puts. The weighted ratio, therefore, can provide a clearer picture of true market conviction.

A key takeaway from my past article, About Put-Call Ratios, is that the weighted ratio tends to generate more extreme readings at market turning points. For example, in bullish periods, it can drop below 0.20, whereas the standard ratio rarely falls that low. During extreme bearish conditions, the weighted ratio can rise above 2.00, a level the standard ratio seldom reaches.

Both ratios can be valuable tools, but understanding their nuances allows traders to refine their market analysis. For more insights into put-call ratios, check out my book book McMillan on Options or the Using Put-Call Ratios seminar.