Tag Archive | "correlation"

Dispersion and Stock-pickers’ Markets

Tuesday, December 31, 2013

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Here’s an interesting new paper from S&P Dow Jones Indices about dispersion and why it is a more valuable estimate than correlation: “[W]hat does it mean to say that a particular index (or portfolio) is diversified? Or more diversified than another, or more now than it was before? In order to speak meaningfully about the internal diversity of an index and its variation over time, quantitative metrics are required. The most commonly encountered is the correlation statistic, but…

Extreme correlation between equity returns and implied volatility

Tuesday, March 26, 2013

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Everyone knows that implied volatility and stock returns tend to be negatively correlated. The results from a recent study we did showed, though, that when implied volatility and stock returns become too negatively correlated, volatility sellers should consider moving to cash. The x axis in fig. 1 shows the two month realized correlation of VXX and SPX returns. The y axis shows VXX returns 15 days after each correlation observation. One thing that stands out from this plot is that, if we…

Rising correlation and stock volatility

Monday, November 19, 2012


In 2011 and early 2012, one of the big themes was the elevated correlation among individual stocks. In the “risk on, risk off” environment, investor appetites for stocks were indifferent to the fundamentals of particular companies: trades were all about the macroeconomic risks. You can get a sense for the major swings in stock correlation by looking at the three month correlation among the Dow Jones Industrial Average components since 2008 – see the bottom panel in fig. 1. One…

SPX Options Yawn as Correlations Increase

Tuesday, June 12, 2012


Here are some observations about volatility and market conditions. 1. Option implied volatility is not especially high. With all the noise in the markets, you might think that options prices have baked in a lot of downside risk. They haven’t. One month SPX historical volatility is about 18%, and one month at the money implied volatility is closer to 20%. If we add in out of the money skew, VIX-style, we get an estimate of 23.5%. That ratio of implied to historical –…

Combining Trend Following and Option Selling Strategies

Thursday, February 2, 2012


Historically, two of the most successful approaches to trading have been trend following and option selling. Trend following and momentum investing are strategies known to just about everybody, and option selling (i.e. collecting the volatility risk premium), while not quite as famous, is hardly a closely-held secret. Usually, these two approaches are treated as strangers. Momentum/trend traders are conceptually long volatility in that they are willing to accept small, frequent losses from choppy markets in order to reap gains…

More Thoughts on Dispersion

Tuesday, November 8, 2011


My recent column for TheStreet on unusually high equity correlations and a dispersion trade idea – “Trading the End of the Risk On/ Risk Off Environment” – was picked up over at CNBC’s NetNet (thanks, John!). I have a few more comments to add in response to reader feedback. First, as I mentioned in the article, it’s definitely not optimal to limit the position to an index straddle and just one equity straddle. The more individual equities…

Trading the End of the Risk On / Risk Off Environment

Tuesday, November 8, 2011


What if the “risk on / risk off” market environment comes to an end, even for a little while? This article explores a trade designed to profit from that possibility. The CBOE Implied Correlation Index got a lot of attention around the blogosphere and on Twitter last week, following Tuesday’s intraday spike to 103 and closing value above 80. Regular readers of my posts here are already familiar with the index, so I won’t delve into a thorough explanation except to…

Is Och-Ziff Reviving the Dispersion Trade?

Thursday, June 16, 2011


Och-Ziff Capital Management (NYSE:OZM), the publicly-traded fund of funds, is getting some attention today from its 13F disclosure to the SEC in May. The asset manager disclosed that it bought nearly $12B in equity options in the first quarter of 2011. Some traders interpreted this as a straightforward bet on increasing volatility, but I had the following comments in a Bloomberg story this morning: Och-Ziff might be following an options strategy known as a “dispersion trade”…

Equity-Dollar Correlation: The Long View

Friday, January 22, 2010

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A major story in late 2009 was the negative correlation between equities and the U.S. dollar. In the chart below, I show the correlation of the logarithmic daily price changes of the S&P 500 and the U.S. Dollar Index futures composite. It appears the attention has been well deserved: both the 3-month and 1-year rolling correlations are the lowest they’ve been in at least two decades. No sooner than some investors began noticing the negative correlation, others started calling…

Volatility Tracker: Negative Dollar Correlation

Monday, December 7, 2009


Volatility Tracker for the week of December 7, 2009 The jump in volatility indexes noted in our previous report was met with a similar decline last week.[2] The VIX could easily make a new 52-week low before 2009 is through. Gold implied volatility advanced sharply on Friday’s price decline [3], with GVZ closing just shy of my 30% short-term target. The shift in the volatility skew in gold deserves attention: if traders continue to pay higher premiums for downside protection…


Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More


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