Serenity in the markets this year means there have been fewer opportunities to sell premium during periods of elevated implied volatility.
When market conditions are challenging, traders often expand their watch lists to uncover new opportunities. Along those lines, a recent episode of Market Measures may be useful for traders that are seeking to expand their volatility horizons.
The focus of the shows is international equity markets, and how traders can potentially use them to diversify their portfolios when implied volatility is low.
As a reminder, here at tastytrade, we often search for underlying symbols with low positive correlation when looking to diversify our portfolios. This approach is discussed in more detail in a recent blog post.
In short, the crux of the philosophy revolves around the fact that highly correlated underlying symbols frequently move in the same direction. By deploying multiple positions with similar risk characteristics in highly correlated symbols, we've effectively doubled down on the same bet.
On the other hand, when our portfolio consists of symbols that possess low or negative correlation, it’s theoretically better insulated from one-way directional movement.
On Market Measures, the hosts explore the current correlation between the S&P 500 and eight other major global indices. The goal is to ascertain whether potential opportunities exist in other large equity markets that may assist with portfolio diversification.
The nine global indices examined in this study include:
Nikkei 225 (Japan)
Hang Seng (Hong Kong)
ASX 200 (Australia)
Euro Stoxx 50 (EU)
CAC 40 (France)
Bel 20 (Belgium)
S&P 500 (USA)
As a reference point, the correlation between the 9 indices listed above was as high as 0.82 during the 2008 global financial crisis, which is extremely high. However, as you can see in the graphic below, the correlation between these same markets is currently much lower:
As you can in the slide above, the correlation between these nine global indices is currently about 0.47, considerably lower than what was observed during the 2008-2009 financial crisis.
Interestingly, such low levels of correlation haven't been observed since the 1990's (nearly 25 years).
The above data suggests that now may be a good time to expand our watchlists to include international equity products. By following these markets and associated equities, we might uncover attractive opportunities that further diversify our holdings.
As with any potential trade, it's important to conduct the necessary due diligence to ensure the underlying exposure matches your outlook and risk profile.
If you have any questions about international indices or the correlations between them, we hope you'll leave a message in the space below or reach out directly at firstname.lastname@example.org.
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
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