Mapping Market Stress Concentration via Put–Call Ratios

Overview

This project develops a signal-generating diagnostic framework for identifying where market stress and downside hedging pressure may be concentrating, using option market structure as the analytical lens.

Rather than producing forecasts or trading rules, the framework focuses on mapping stress concentration by decomposing put–call ratios into short-term hedging flow, embedded positioning, and term-structure placement across expirations.

The output consists of interpretable signals designed to highlight where stress may be building, at which maturities, and whether current activity is reinforcing or diverging from existing exposure. These signals are intended to inform broader market analysis and risk assessment, not to serve as standalone conclusions.

Data

The analysis uses listed index ETF options, sourced live from public option chain data.

Covered underlyings include:

• SPY – S&P 500 (broad U.S. equity market baseline)
• QQQ – Nasdaq-100 (growth and technology exposure)
• DIA – Dow Jones Industrial Average (large-cap industrial / blue-chip tilt)
• IWM – Russell 2000 (small-cap equities)
• XLF – U.S. financial sector
• KRE – U.S. regional banking sector

These instruments are selected for their liquidity, depth across expirations, and relevance for assessing both broad market and sector-specific stress dynamics.

All outputs are snapshots at the time of execution. The framework does not construct historical datasets or perform backtests.

Core Signal Metrics

The framework computes multiple complementary metrics. Each captures a different dimension of market stress.

Put–Call Ratios (PCR)

Two distinct put–call ratios are computed.

• Volume-based PCR (flow)
  PCR_vol = Put VolumeCall Volume
  This measure captures short-term hedging demand and is sensitive to events, macro releases, and rapid positioning changes.
• Open-interest-based PCR (positioning)
  PCR_OI = Put Open InterestCall Open Interest
  This measure captures embedded downside exposure already sitting on dealer balance sheets and reflects longer-horizon positioning.

Keeping these measures separate allows the framework to distinguish new hedging activity from existing risk inventory.

Flow vs Positioning Divergence

Divergence_vol−OI = PCR_vol − PCR_OI

This metric compares current flow to existing positioning.

General signal interpretation:

• Positive values suggest new hedging flow is more put-heavy than the existing positioning baseline.
• Negative values suggest positioning is already skewed toward downside protection relative to current flow.
• Divergence highlights changes in stress dynamics, not absolute stress levels.

Hedging Impulse

Impulse_vol/OI = PCR_volPCR_OI

This ratio measures how aggressive current hedging activity is relative to embedded positioning.

General interpretation guidelines:

• Impulse > 1 indicates current flow is more downside-skewed than existing positioning.
• Impulse ≫ 1 may signal unusually strong short-term hedging pressure.
• Impulse ≈ 1 or below suggests flow is broadly consistent with existing exposure.

These thresholds are context-dependent and should be calibrated against historical distributions for reliable interpretation.

Event Score (Stress Concentration Proxy)

EventScore_i = (TotalOI_iΣ_j TotalOI_j) × PCR_OI,i

This metric combines:

• the relative size of open interest at a given expiration, and
• the directional skew of that positioning.

General interpretation:

• Higher values indicate expirations that are both large in size and heavily tilted toward downside protection.
• Such expirations may represent localized stress concentration or heightened event sensitivity.
• This score is designed to highlight where stress matters, not to predict outcomes.

Term-Structure Analysis

Signals are computed at the individual expiration level, preserving full granularity across the option curve.

As an additional summary layer, expirations are aggregated into non-overlapping maturity buckets:

• short-dated: 1–20 days
• medium-dated: 21–60 days
• longer-dated: 61–120 days

Bucketed summaries provide a high-level view of whether stress is concentrated in the near term or extending further along the curve. The per-expiry signals remain the primary analytical output.