About the CBOE S&P 500® Implied Correlation Indexes
The CBOE S&P 500 Implied Correlation Indexes measure changes in the relative premium between index options and single-stock options. A single stock's volatility level is driven by factors that are different from what drives the volatility of an Index (which is a basket of stocks). The implied volatility of a single-stock option simply reflects the market's expectation of the future volatility of that stock's price returns. Similarly, the implied volatility of an index option reflects the market's expectation of the future volatility of that index's price returns. However, index volatility is driven by a combination of two factors: the individual volatilities of index components and the correlation of index component price returns.
Intuitively, one would expect that the implied volatility of an index option would rise with a corresponding change in the implied volatilities of options on the index components. Yet, there are times when index option implied volatility moves and there is no corresponding shift in implied volatilities of options on those components. This outcome is due to the market's changing views on correlation. The relationship between the implied volatilities of options on an index and the implied volatilities of a weighted portfolio of options on the components of that index, therefore, becomes a measure of the market’s expectation of the future correlation of the index components - the "implied" correlation of the index.
For example, from November 20, 2008, through May 29, 2009, the closing value of ICJ ranged from a low of 56.54 on November 21, 2008, to a high of 74.78 on March 20, 2009. During the same time period, the CBOE Volatility Index (VIX) declined significantly from a record-high close of 80.86 on November 20, 2008 to around 40 in mid-March and 29 at the end of May. Conversely, ICJ remained relatively high with a closing value of 58.94 recorded on June 30, 2009, possibly signaling an expectation that equity prices would continue to move together.