## VT: Sector volatility and relative value, correlation and convexity, and VIX

Wed, Oct 16, 2013 | Jared Woodard

*In this series, we’re introducing some of the key features of the new *Volatility Tracker* research publication. To see a full feature list and get more details about the product, go here.*

**Equity sector volatility monitor:** The left half of the table above shows price levels, price changes over the past week and month, and six month beta coefficients (ref. SPY) for the U.S. equity sector ETFs listed. The sector volatility monitor uses the Morningstar equity classification structure of cyclical, sensitive, and defensive industries.

The right half shows levels and changes for three month implied volatility in those sector ETFs. Minimum and maximum values of 3M IV, two year percentile rank, and z-score values are all based on the last two years of data. The weekly change in 3M IV is measured in volatility points rather than percent, and the maximum and minimum weekly changes are highlighted. Percentile ranks lower than 20% (higher than 80%) are highlighted in green (red), suggesting that implied volatility may be attractive to buy (sell). Z-scores are calculated as the difference between current 3M IV and two year 3M IV, divided by the standard deviation of two year 3M IV.

**Equity sector correlation matrix:** The correlation matrix heatmap above shows the pairwise realized correlations of U.S. equity sectors for the past 3 and 24 months. 3M realized equity sector correlations are above the diagonal; 24M correlations are below the diagonal.

**Equity sector relative value:** The table above shows the ranked percentile of the ratio of current one month sector and S&P 500 implied volatility using the last year of data. Values are calculated separately for each asset and ordered. The charts above show the time series of the highest and lowest ranked sector IV ratios, with one year maximum and minimum values plotted respectively. Investors should consider a bias in favor of owning options in low-ranked sectors and a bias toward option selling in high-ranked sectors.

**Downside beta vs. put volatility: **This chart shows the relative attractiveness of major ETF 2-month at the money put implied volatility as a function of 4-week down beta vs. SPY. Down beta is a regression for only negative market returns. High beta, low IV ETFs offer cheaper hedge protection, while low beta, high IV ETFs are more attractive short vol candidates. Highlighted are the highest- and lowest-ranking assets as measured by the residuals from the linear regression shown on the chart.

**SPX implied correlation indexes:** The CBOE S&P 500 Implied Correlation Indexes are estimates of the average correlation of the stocks that comprise the S&P 500 Index (SPX). Using SPX options prices and the prices of options on the 50 largest stocks in the S&P 500 Index, the indexes track the relative cost of SPX options compared to the price of options on individual stocks.

**SPX realized correlation:** The S&P 500 average one month stock correlation is the mean value of the most recent one month correlation of each S&P 500 constituent’s returns with the returns of the index. A high average value indicates that index constituent returns are determined more by broad market factors than by individual stock fundamentals.

**Volatility futures, options, and ETPs:** The set of four charts above (click to enlarge) shows key metrics for the world of tradable volatility products. In clockwise order, at the top left the VIX futures curve shows the last prices of listed contracts with a fitted polynomial regression; the VIX commitments of traders data from the CFTC shows the positioning of speculator and hedging customers; a recent performance comparison of U.S. and European short term VIX ETPs; and the time series of one month VIX-style implied volatility for VIX options (VVIX).

There are three other sections of the report that will be reserved for readers. The **strategy indexes** section will review the performance of options-based strategy indexes published for several world markets. We will update **key U.S. economic indicators** to provide a grounded look at economic fundamentals. Finally, the **research literature review** section will include notes on relevant academic and industry research along with summaries and selected charts, typically for at least one paper or report each month.

*Volatility Tracker* will be available by subscription and we will post pricing information and access links soon.

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October 16th, 2013 at 1:06 am

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