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I need to calculate the put-call ratio for an American option. But I'm a complete naïf: I don't know how. I think I'd use the put open interest and the call open interest. I can imagine two ways to calculate PCR:

  1. Simply (as some references tell me) take OIputs divided by OIcalls and there's my number, right there:

    PCR = OIputs / OIcalls

  2. Or (as other sources seem to suggest) take OIputs divided by the sum of OIputs and OIcalls:

    PCR = OIputs / ( OIputs + OIcalls )

Further, I don't even know if the ratio can most usefully be expressed as a decimal (i.e., 0.667) or as a fraction (i.e., 2/3) or as the ratio notation I learned in grammar school (i.e., 2:3).

What's the usual, expected, and/or "right" way to calculate PCR?

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up vote 4 down vote accepted

There is, unfortunately, no broad agreement on this point. In fact, put-call ratios may be constructed from volume as well as open interest, and they can even be constructed from certain subsets of the options chain (e.g., only certain strikes or tenors). I have usually used your option #2, because option #1 has a tendency to be extremely high or even undefined whenever call open interest is very low. This nonlinearity is an undesirable feature for any indicator going into a trading model. Most academic studies, such as Pan and Poteshman (2006), use this version as well.

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Thanks! Option #2 certainly seems the more sensible way, but risks confusing my visitors, who might be expecting option #1. Sigh. – Pete Wilson Oct 8 '11 at 9:54

CBOE defines Put Call ratio as PCR = OIputs / OIcalls and I have always seen it defined this way. You should express it in a decimal way, a fraction doesn't really make sense here if you have 9999 in OIcall and 9998 in OIput for instance.

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Thanks for that opinion and direction. Decimal it is. – Pete Wilson Oct 8 '11 at 9:54

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