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Volatility Run-Up More Extreme in Indices Than Stocks


The two drivers that made this happen last week.

Before we get to correlation, let me just label the charts below. They're all a one-month look at 30-day implied versus realized volatility. On top we have SPY, in the middle we have Potash (POT), and down below we have OIH.

As you can see, quite a jump in implied volatility in $SPY last week -- about 50%. Big jumps, too, in Potash and OIH volatility, though not close to SPY in percentage terms, it's more like 20-25%. That's roughly typical around the Street, though with earnings either just out or soon to be out in a host of names, there's much variability in that. But however you look at it, the run-up in volatility was far more extreme in indices than individual stocks or sector ETFs. Or commodity ETFs for that matter, as GLD only lifted 10-15%.

So why's that?

Well, index volatility has two drivers to it. It's part the volatility of the component stocks themselves. The more volatile the components, the more volatile the index. The other part is the degree to which those component stocks correlate. The higher the correlation, the higher the index volatility.

And in the past week, correlation has exploded. They threw everything out the door last week, hence the disproportional lift in SPY volatility relative to component stock and group volatility.

In my humble opinion, that's a fade. I'm generally doing that by going long options gamma in individual names versus shorting it in IWM and SPY. Yes, that's Dispersion. My thought is correlation will tamp down and and names will get their own minds again.
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