Maarten Mosselman

Here's a good way of appreciating how much diversification is priced into the options market. The scatter plot shows the level of the $VIX versus the VIXEQ (the single stock VIX, calculated from option prices on NVDA, GOOG, MSFT, AAPL, etc.). The VIX is always lower than the VIXEQ because on any given day, some stocks rise, some fall in the SPX, reducing the overall level of volatility at the index level. The question is how much lower should it be. The white star shows today's level of 18.4 VIX and 44.5 VIXEQ. Two questions. First, historically, what level of VIXEQ has coincided with today's VIX level? The blue dot shows, for example, that in early 2022, a VIXEQ of 35.3 coincided with the same 18.4 VIX we see today. Single stock volatility was nearly 10 lower to get the same VIX. Next question, when the VIXEQ was at today's level, where have we historically seen the VIX? The second blue dot shows that in Oct'22, a VIXEQ of 44.6 saw a VIX of 30.1, nearly 12 higher than today. The ratio of the VIXEQ to the VIX maps directly to the 1m implied correlation (IC) on SPX options (second chart, IC is inverted). All of this makes sense in light of the low correlation between stocks like GOOG, MSFT and NVDA. A risk would be that this never seen before level of return dispersion stops.

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