Dollar-Weighted Put / Call Ratios By Fari Hamzei of HamzeiAnalytics.com* Posted: April 23, 2004

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What is a Simple Put / Call Ratio versus a Dollar-Weighted Put / Call Ratio ($wPCR)?

A Simple Put / Call Ratio (PCR) measures only the ratio of contracts between puts and calls. It values every contract the same. For example, if one traded 300 IBM Puts and 600 IBM Calls, the Simple PCR would be 0.5. The fact that every contract is weighted the same in this calculation is a major problem because options premiums vary for different strikes and different expirations. The simple put / call data is simply too FLAT. You cannot decipher a reliable SIGNAL from a flat curve!

Hamzei Analytics reasoned that not all options contracts within an options chain were created equal. Rather, they have discrete values and, therefore, that they should be weighted differently according to their real dollar value. Thus was $wPCR born!

Dollar-Weighted Put / Call Ratios are much more specific and calculate the total dollar amount on each side of the fraction (ratio). The $wPCR is a vast improvement over a Simple PCR. You now know, in real time, where the smart money is placing bets! This is a huge advantage.
$wPCR is a powerful tool. There are no guarantees implied here, but you will have tilted the odds in your favor. The advantage of Real-Time, Dollar-Weighted Put / Call Ratios is that they enable you to view changes in investor sentiment as they occur. Simple put / call ratios are based on contract volumes alone. Real-Time, Dollar-Weighted Put / Call Ratios reflect changes in both volume and option premiums.

The above screen shot is an example of a $wPCR table.

And, here is how it looks in a chart:

Interpreting $wPCR : What is considered Bullish or Bearish?

• For Stocks and Sector HOLDRS:
  • 0.1 - 0.5 Bullish
  • 0.6 - 2.0 Neutral -- no signal
  • 2.0 and up Bearish
• The closer to ZERO, the more Bullish....the further away from 2, the more Bearish.
• Large Indices (SPX and NDX) behave in a Contrarian fashion (opposite of stocks)
• For instance, NASDAQ-100 general guidelines are as follows:
  • 0 - 10 Bearish
  • 10 - 20 Neutral
  • Above 20 Bullish
• Watch for liquidity: $wVolume is critical.
• S&P 500 general guidelines are:
  • 0 - 5 Bearish
  • 6 - 10 Neutral

Above 10 Bullish

The most success will come by using extreme levels. Use the ones that are moving in the same direction as the market for the best probability of making money. You are tilting the scale heavily in your favor.

Signals are good for a few hours to 2 - 3 days. The $wPCR is only a sentiment indicator, albeit, a very sophisticated one. It is not a BUY or SELL signal in itself. It is indicating one of three types of sentiment: BEARISH, NEUTRAL or BULLISH.

A note to eSignal subscribers: There are plans in the works to include this indicator as an EFS file available for use in the eSignal application.

*Reprinted (and modified) with permission from Hamzei Analytics

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