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By Chris Dieterich and Steven Russolillo
The CBOE’s VIX index got crushed yesterday as stocks rose, a reflection of diminishing expectations for the S&P 500 to dart around during the next month. But stock pickers will point out that correlation, another prime metric for the equity-options market, is similarly getting pummeled.
The CBOE S&P 500 Implied Correlation Index, which measures the expected correlation of S&P's 50-largest stocks versus the index based on options prices, is hovering around its lowest level since August 2008, according to MKM Partners.
That means single stocks are moving less in unison and fundamental picks are less buffeted by macro events. The Implied Correlation Index is down 7% at 66.92 and has fallen 20% since last peaking in December.
For some historical perspective, the measure spent much of the latter part of 2008 above 80 and rose above 100 during some of the worst parts of the financial crisis. This compares to the more typical 40-to-60 range seen during calmer periods, when stocks trade more disparately.
The index moved well above 80 in the second half of 2011 as stocks experienced big swings in both directions while staying tightly correlated.
Correlation, or “dispersion,” trading is a popular strategy utilized in the options market, whereby traders set up positions based on their views of how tightly stocks will rise and fall together. By buying and selling often-complex combinations of index and single-stock put and call options, traders can bet that the market will continue to push up and down in lock step, or whether individual stocks will start to disperse based on company fundamentals and other stock-specific factors.
The waning correlation signal has mirrored the options market's more famous sentiment indicator, the VIX, which earlier this week flirted near a five-year low.
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MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what's happening in the markets. Lead writer Steven Russolillo spearheads the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to marketbeat@wsj.com.
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