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The Year in VIX versus the Year in Stocks


Dispersion trades exist at good prices -- in certain spots.

So flashback one year ago. Before the financial system nearly imploded, it was rather calm. And the VIX was almost exactly where it sits now.

In light of this whole correlation excitement, I ran some comparisons of how volatilities of different ETFs and a few individual stocks, compared to the VIX on Thursday, a month ago, and a year ago. The "year ago" column relied on my eyeball estimate of the ETF/stock volatilities, as the charts didn't give exact numbers. But it's more to compare then to now -- not to get it exactly to the penny.

Anyway, you can see the numbers here. Or you can rely on my description.

Basically, some ETFs, like XLF, XLE, XHB, and XRT, now trade at implied volatilities significantly cheaper relative to the VIX than they did a year ago. AAPL does, too, as does POT. Other ETFs, like EEM and IYR, aren't significantly different relative to the VIX. Nor is CAT.

What's it all mean?

Well, not all that much. If you like the dispersion trade, which involves going long individual stock gamma and short index gamma, you can do it at pretty good prices in many spots. That's the good news. The bad news: I've found from personal experience that you really will just churn with the play unless volatility perks up.

In other words, let's say you go buy AAPL and XRT and XLF options gamma (say long straddles or strangles) vs. short gamma in SPX or SPY. The daily decay you earn on the short gamma should roughly offset what you pay for your long gamma.

You're now effectively betting that correlation will decline and/or volatility in these names will lift relative to SPX/SPY volatility. Anecdotally, of all the things to root for, a simple broad-based lift in volatility works best, even if correlation doesn't budge.
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