Because of unsystematic risk* in single stocks, they tend to have higher IV and higher premium than indices. When is it most beneficial to sell premium in single stocks vs the index?
Typically, the IV discrepancy tends to be highest in complacent markets and lowest in distressed markets. To measure this discrepancy the CBOE created the Implied Correlation Index. It measures the expected average correlation of price returns of the S&P 500 Index components, implied through SPX option prices and prices of single-stock options. The Implied Correlation Index has a high correlation with the VIX, both increase in market sell offs and decrease in market rallies.
Using the VIX as a proxy for Implied Correlation, we look at the historical returns for selling Straddles (managed at 25%) in individual stocks when the VIX is above and below 15. VIX<15 would indicate a low correlation of single stocks to the index and VIX>15 indicates a higher correlation. We looked at 8 major stocks in the S&P 500 from 2007-Present. Make sure to tune in for the results!
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