Correlations and Sector Indices

15 Charts on Correlations and Sector Indices

In the construction of well-diversified portfolios, investors often explore the topic of correlations of performance among different indexes. Below are more than a dozen charts on the topic of correlations and the S&P Select Sector Indices.

Correlations versus the VIX Index

The Cboe Volatility Index® (VIX® Index) is a leading measure of market expectations of near-term volatility conveyed by S&P 500 Index (SPX) option prices. Many investors have explored the fact that the VIX Index has had properties of convexity and negative correlations versus many stock indexes.

Cboe S&P 500 Implied Correlation Indexes

Using SPX options prices, together with the prices of options on the 50 largest stocks in the S&P 500 Index, the Cboe S&P 500 Implied Correlation Indexes offer insight into the relative cost of SPX options compared to the price of options on individual stocks that comprise the S&P 500. The Cboe S&P 500 Implied Correlation Indexes may be used to provide trading signals for a strategy known as volatility dispersion (or correlation) trading. For example, a long volatility dispersion trade is characterized by selling at-the-money index option straddles and purchasing at-the-money straddles in options on index components. One interpretation of this strategy is that when implied correlation is high, index option premiums are rich relative to single-stock options. Therefore, it may be profitable to sell the rich index options and buy the relatively inexpensive equity options. The webpage has more information and a link to a spreadsheet with S&P 500 Implied Correlation Indexes - Historical Data.

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