Recent equity market upheavals are presenting new challenges and opportunities for volatility and correlation traders. With the downturn in markets that kicked off at the end of February came a massive jump in short-dated implied volatility. The Chicago Board Option Exchange’s Vix index, which measures the implied volatility of S&P 500 index options and represents the market’s expectations of volatility over the next 30 days, jumped almost 80%, increasing from about 10% to 18%. Volatility in other major equity markets, such as the Eurostoxx, also jumped, as did equity market correlation. The 30-day realized correlation level on the Eurostoxx 50 doubled from just under 20% to 40%. Immediately before the downturn, volatility and correlation had been trading at historically low levels.
John Ferry,
April 01, 2007