Market Measures

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Strangle Correlations

Market Measures

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Trading the four main index products (SPY, QQQ, IWM, DIA) does not yield much diversification when simply trading price action. However, what if we traded the same option strategy in all four of these? Would we still not be diversified or do options strategies actually yield more in the way of diversification than outright stock in correlated underlyings?

Study
  • SPY, DIA, QQQ, IWM
  • 16 delta strangles (16 delta call and put)
  • 2005 to present
  • 45 days to expiration
  • Recorded correlations between strangles' P/L and compared them to correlations between outright price.

We found that trading the strangles as opposed to outright price provided 30% less correlation. This means that trading options, even on correlated underlyings, provides more diversification than going long or short outright underlyings.

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