Constructing an open-interest-scaled put-call ratio

Measure each side against its own open interest

A raw put-call volume comparison is treated as a distorted sentiment gauge because option activity is more informative when each side is measured against the open interest attached to it. Open-interest-analysis scales current put or call volume by the matching open-interest book so the reading reflects turnover intensity, not just which side printed more contracts.

Keep bull-intensity and bear-intensity visible

Bull-intensity is constructed as call volume divided by call open interest, isolating how hard the bullish side of the options argument is turning over. Bear-intensity is constructed as put volume divided by put open interest, isolating how hard the bearish side of the options argument is turning over. Each side of the argument can then be read on its own.

Restate the put-call-ratio after scaling

Combining those sides produces bear-intensity divided by bull-intensity, which is the open-interest-adjusted-ratio. That construction restates the put-call-ratio after adjusting for the relative size of each open-interest book. The put-call-ratio then compares put activity with call activity so the balance of the two sides can be read as a market-regime overlay rather than a raw tape count.

Use one weekly-equivalence-scale

Daily index-option put and call volume is multiplied by five so daily series and weekly single-name series can be compared on one weekly-equivalence-scale.

Place call-side data in the numerator for a trend overlay

When the series is built as a trend overlay rather than an extreme oscillator, call-side data is placed in the numerator so the line travels with price and direction changes are easier to mark. That inverted-sentiment-trend is the same construction with call-side data in the numerator. Intact uptrends were associated with a declining path, or a rising path if the ratio is inverted.

Historical extreme bands

Two-day weekly-equivalent totals were assigned historical extreme bands of 500 or more before 1987 and 350 or more afterward for bottom-area readings, versus 140 or less before 1987 and 200 or less afterward for top-area readings. Single-day readings near 300 were mapped to important bottom areas, while readings near 250 were placed two to four weeks before a final low and again near that low. Persistently high daily readings of 150 or more were described as preceding important market weakness by two to five weeks.

Weekly conditions on individual names

On individual names, weekly readings of 300 or more were treated as bottom-area conditions, readings of 60 to 70 or less as top-area conditions, and readings of 50 or less lasting two to three weeks as blow-off-top conditions.

Compare the ratio path with price

Ten-week and 34-week ratio windows were compared with a broad equity index through April 1988. Ratio-versus-price divergences in early 1983, mid-1985, early 1986, and late 1987 were cited as preceding later declines or sideways stretches. Divergence is a chart condition in which the open-interest-scaled sentiment series fails to confirm a price high or low, framing a later weakness, pause, or turn as a testable hypothesis.