Macro Wrap – Dispersion

Disperson is a trading term used to describe the degree of variation in the movements of the index components.  For example, yesterday was a high dispersion day, where the SPX index ended unchanged, but there were large moves in the underlying index components in both directions.

The SPX index closed down 0.18%.  Meanwhile here are all the SPX top 200 components that moved more than 2%:

  • AAPL +2.4%
  • PM +2.4%
  • AXP +2.6%
  • V -2.3%
  • NWSA -2.3%
  • NOV +2.3%
  • AGN -2.2%
  • PSX +2.5%
  • PRU -2.8%
  • DVN +2.4%
  • CTSH +2.9%
  • JCI -2.3%
  • YHOO +2.4%

Add to that the numerous names that moved more than 1%, and you had a day with significant dispersion.  Why is that important?

As options traders, we watch volatility closely because if there is no volatility, then it’s unlikely that long options trades will end up profitable, since the stock won’t move enough to get through a desired strike.  In this environment of high dispersion, single stocks are actually displaying decent volatility, but the underlying indices are not.  The SPX index has been stuck in a 20 point range for more than 2 weeks now.  However, under the surface, single stocks are making big moves.

As long as this persists, it makes sense to keep long options trades focused on single stocks rather than on the indices.  Of course, when the low correlation environment finally ends, it will do so without warning.

Markets overnight:

  • Quiet session in Asia ex-Japan, with markets mixed, moving less than 1%.  The Nikkei however was down 1.8% as the yen moved more than 1% higher.
  • European stocks have been green for most of the session, led by a bounceback in Spain and Italy as bond yields there decline a touch.
  • SPX futures have traded within 3 points of unchanged overnight, currently unchanged.
  • The dollar is mixed vs. various crosses, Treasuries are a touch higher, commodities are generally green with the exception of gold, down 0.1%
  • AAPL trading up 0.7% in the pre-market, continuing yesterday’s rally.