CBOE S&P 500 Implied Correlation Index (JCJ-E) Recently Hit Its All-time Low of 57.03

Over the past decade many investors have asked if stocks recently have had higher correlations with indexes and are now tending to move more in lockstep with each other. Volatility dispersion (or correlation) trading has gained in popularity in recent years, and useful signals regarding correlation are provided by the CBOE S&P 500® Implied Correlation Indexes.


The CBOE S&P 500 Implied Correlation Index (JCJ-E, Jan. 2014) fell from 87.1 on Dec. 14, 2011, to its all-time low of 57.03 on Feb. 11, 2013, a drop of 34.5% www.cboe.com/JCJ On Feb. 22, 2013 the JCJ-E Index closed at 58.24.


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The CBOE S&P 500 Implied Correlation Indexes measure changes in the relative premium between index options and single-stock options. 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 language in this paragraph is excerpted from www.cboe.com/JCJ, which has much more information on this topic.)