Measuring Correlations Across Global Markets
Market information from distant corners of the world is now available at the fingertips of traders and investors located thousands of miles away. Likewise, the interconnected nature of the global supply chain also means stock-related news often ripples across international borders.
For these reasons, it's worthwhile for traders to monitor correlations between international markets and maybe even consider trading these products should they match a trader's strategic approach and risk profile.
A recent episode of Options Jive on the tastylive financial network takes a look at current correlations between some of the world's largest equity markets, and may be of interest to traders looking for new ideas or further diversification in their portfolios.
Positive correlation, in trading terms, tells us to the degree to which two underlying securities move up and down together. Negative correlation tells us the degree to which two underlying securities move in opposite directions. A high positive or negative correlation may indicate there's an opportunity for the deployment of risk.
Additionally, this episode of Options Jive presents the current correlations (using the past year of data) between SPY and some of the ETFs that represent the international categories discussed in the previous graphic. Not surprisingly, these correlations also are quite high, as shown below:
Average Correlation between SPY and EFA (Non-US Developed Markets ETF): +0.8
Average Correlation between SPY and EEM (Emerging Markets ETF): +0.7
Average Correlation between SPY and FEZ (Eurozone ETF): +0.7
Taking this examination a step further, tastylive also investigated the correlation between SPY and some of the individual country ETFs. Interestingly, correlations between these products were relatively lower. Of the individual country ETFs, Germany (EWG), the United Kingdom (EWU), and China (FXI) showed the highest correlations of this group, measuring in at +0.7, +0.6, and +0.6, respectively.
In terms of trade idea generation, it’s important to keep in mind several factors. If you are already short premium in SPY, and you sell additional premium in a product highly correlated to SPY, you have effectively increased the exposure of your original position. This is a reason that one might look for offsetting risk in products that are highly correlated.
For example, if the SPY is highly correlated to a hypothetical index XYZ in Country A, and implied volatility in XYZ has an elevated Implied Volatility Rank (IVR), while SPY IVR is low - it may be possible to buy premium in SPY versus selling premium in XYZ - and let mean reversion go to work.
On the other hand, if low correlation exists between two products, there may be the opportunity to diversify your portfolio by deploying risk in both products - using the same structure.
For example, if SPY has a low correlation with hypothetical index ABC in Country Z, and implied volatility is high in both SPY and ABC, a trader may decide to sell volatility in both products. In this case, because the two products are not highly correlated (and therefore don’t necessarily move together) a trader has now diversified their exposure away from SPY, but with a similar high-probability of success profile.
As always, it’s advisable to monitor a product (and possibly even mock trade it) before deploying a live position. At the very least, by adding the country and regional ETFs to your watch list, you may be able to build out your understanding and familiarity of these products in the event you decide to trade them in the future.
We hope you’ll take the time to review the full episode of Options Jive when your schedule allows.
As always, don’t hesitate to reach out at support@tastylive.com with any outstanding comments or questions.
Your feedback is much appreciated!
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.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2023 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.