Extreme options dispersion signals imminent market spasm
The extreme divergence and low correlation between single-stock implied volatility and index volatility (measured by the Core 1M index) signals an imminent market volatility spasm and potential correction.
The argument
The guest argued that when the Core 1M correlation index drops below eight, the options market relationship becomes unsustainably out of whack. With the index currently at five, the market is set up for a sharp correction or resyncing of these busted volatility relationships, similar to previous drawdowns in June.
The thesis, stress-tested
✓ What validates it
- ✓Core 1M index rising back above eight during a market sell-off
- ✓A 5% to 10% correction in the Nasdaq (QQQ) or S&P 500 (SPY)
▸ Risks discussed
- ▸Dip-buyers immediately stepping in to blunt the drawdown
- ▸Strong earnings continuing to justify extreme single-stock valuations
Hear it yourself
"And so I think what we're setting up here now is for a pretty sharp kind of correction or, resyncing of a lot of volatility relationships that are kind of busted right now to to kind of, phrase it that way."
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