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With VIX Failing To Respond, Investors Getting Long Correlations
With the VIX - S&P intraday correlations now broken on a daily basis, investors are expressing bearishness by going long equity option implied correlation (the factor linking individual member vols to index vols). With the VIX openly gamed, is the ICJ now the relevant indicator for the cost for "portfolio insurance"?
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Holy shit I'm lost..! I've never heard of equity option implied correlation before.
Welcome to the land of ZH, where the math geek rules.
Yeah, seriously. TD, since its not like your updating the site alot, and it seems you're not managing any positions that require your attention, could you use some of your spare time and create a dictionary of terms or some other tool for us finance newbies. Thanks. Great Site!!
Try clicking on the GLOSSARY tab at the top of the page.
The glossary is just an index. it cites where terms are used on ZH. I see no definitions.
If I'm not mistaken, this sounds like dispersion trading. Look it up "dispersion trading," I'm too lazy to explain it. Have fun trying to figure it out lol.
Good place to start:
http://www.cboe.com/micro/impliedcorrelation/default.aspx
Cheers,
Holger
That helped. I'm getting my a$$ kicked by mathletes.
bolweevil
I'm lost too, but can somebody explain why the ^VIX is basically flat today and up 10% since Friday even as stocks are rising huge? Is this a signal that we may be heading for a huge down day soon? Really, can this be read into the action? Nobody seems to be talking about this...
VIX measures Volatility (UP OR DOWN)
So ZH will continue to confuse you with posts on VIX, HFT, fabricated Short Interest data, Rosie crap, Bond market machinations .... Focus on the GDP expansion and implications
What GDP expansion?
Which planet do you live in?
Oh, you mean the GDP that results from our economic activity?
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a3Ta.LVhokdY
You're obviously a freaking shill. Here's a thought: Go fuck yourself somewhere else.
"You're obviously a freaking shill.
maybe a shill short ...
"Here's a thought: Go fuck yourself somewhere else."
Tried that and ended here!!
Yes, it would be nice if some explanation of the important implications could be included in these stories for those of us who are less advanced but eager to learn. Could you be so kind Tyler? Much appreciated.
Currently seeking real-time metrics which will indicate when the ice I am walking upon has become too thin to support my weight.
I'm sorry, I bought one 25 put on the vix as a hedge for my SPY puts. As the only organic order today on 25 strike vix puts, the computers will not allow the vix to drop below my strike price until I sell it back to them at a loss.
Hey chaps - perhaps quick primer on dispersion (or correlation) trading in equity option land is useful.
FDAXHunter (from Wilmott and NuclearPhynance fame) has the best (as far as I am concerned) intro to this market - http://www.scribd.com/share/upload/14012192/2fhi5esfijw60x6gs7zj
The bottom line for me is that a look at the long-term chart of implied correlation shows that we have moved into a new regime since the Fall08 events and that we are currently testingthe lows of that range. The view being that correlation will tend to increase when a 'crash' event occurs (and all stocks move together). This skew to correlation is notable as when rallies occur the correlation tends not to rise as much and we see 'leader' groups coming out (think commodities OR financials). The fact that VIX has been moving so 'interestingly' raised some heckles in our shop and a quick look at the implied correlation over time shows that this week's rise in VIX seems driven by traders getting long correlation (buying INDEX vol, versus selling individual name vol). From a capital structure perspective, we notably have seen that single-name vols are 'high' relative to spreads and stocks (in a smarty pants model) and so perhaps this long correlation trade also helps some hedgies to manage their CapArb trades?
Clear as mud right?
You mean "regime" in the sense of Derman? Did you test for structural breaks in the VIX process to determine when the regime chnage occurred?
Interesting post...
Ahh, much better.
bolweevil
Thank you Tyler!!! I have suspected this was occuring but hadnt been on a bloomberg lately to investigate.
Would you mind posting some charts with .25Delta put Vs. Call IV on SPX and Nasdaq.
Interesting observation... when you watch CNBS these days, they have the VIX at the top of the screen for Oil, S$P and Nasdaq... do you remember when this started? Just about 2-3 weeks ago. Do you know why? The VIX was starting to go down, way down...it reminds of the days begining of the year when they used to put BAC, C, etc to short...
I'm a vol trader, and right now the volume of volatility trading in the market is at summer time lows, so I wouldn't imply much about the relationship between vols (ie vix) and the stock market right now. That said, the reason the vix has floored here is that correlations have reverted to historical lower levels, and there just aren't that many people interested in selling vols at these low cheap levels, safer to buy. Happy Hunting.
W.T. Door
No VIX movement with big jumps in stocks implies people believe the "expected movement" for stocks is the current direction.
Hence, this large swing up in stock is exactly what people expect to keep happening for the foreseeable future.
Viva el toro!
TD - Hat Tip to Anon #18295??
DRN puts trading. Who needs VIX?