The Correlation Trap: Why Volatility Could Explode

本站添加: 2026-05-30

[00:00:08]Welcome to Theot Trade. This is Don Kaufman.

[00:00:12]Welcome to the Theot Trade weekend update. It is May 29th, 2026.

[00:00:18]Just about 25 minutes left inside of the trading week. S&Ps once again to the upside. It has been pretty consistent grind to the upside throughout the course of uh well holiday trade this week. So the S&Ps are up 20 right now.

[00:00:35]But I got to tell you something that's not exactly what's on my mind. There is a huge amount to talk about on this trade weekend update. And I'm going to tell you right now, it's not what you think. It's not just about like the S&Ps are up and the NASDAQ continues higher and the Russell actually seeing a little bit of sellside activity today. the Dow.

[00:00:53]Even the Dow was up today after being flat throughout the course of the week.

[00:00:57]Push all of that aside because I'm going to kind of blow your mind for just uh a few minutes here. Uh we're going to talk about correlation and what I'm actually terming the correlation trap and why this could lead to an absolute eruption in volatility. Volatility could explode and in the here and now like you've got to watch out right now in this marketplace. we are right on that that kind of cusp of where volatility can explode. And you're going to see exactly why volatility can explode. And um it's interesting because a lot of people then are immediately going to like run to the VIX trade and be like, I'M GOING TO BUY THE VIX. NO, YOU'RE not because it's already pricing it in. So, we're going to cover this in some depth here on this Theo Trade weekend update. Let's uh let's get right into it with a discussion. Let's start here in the S&P.

[00:01:48]So, it's 4-day trading week. Okay, the S&P given this 4 days, where do we END UP? SPOT ON. WE ARE on the expected move. And I love to point this out because you're dealing with a $7,591 product. That is the S&P. And I often term the S&P the mother of all products.

[00:02:10]And you're dealing with the $7,500 product. And do you realize that uh me, this little geek sitting in a seat in Flagstaff, Arizona right now? I drew that line, okay, over the weekend. And where are we trading right now? Smack on. That's the expected move. That is the upper edge of the expected move. You want to talk about like people like this market's unruly and they want to put all these names on it. Yeah. How about the marketplace hit exactly I mean to a tea of what it was expected to do. I mean, we're down to the freaking point, people. Um, sure. We could ramp up a little bit from here, but let's not get crazy. All right, let me start to explain a bit about this what I'm terming like a correlation trap. Now, when you think of correlation in the marketplace and and we're going to kick this off because again, as I said, you know, you can go like, oh, the S&Ps and and this level, you got levels in the S&Ps. We're in uncharted territory, right? It's an all-time high.

[00:03:08]So, why should you have concern right now about volatility? Why should you have concern about correlation? First of all, when most people think of correlation, they think of right here.

[00:03:17]Okay, here being this is the S&P 100.

[00:03:20]It's an advanced decline line. The advanced decline line has been a proverbial slopfist. You got one stock up, one stock down. We're all over the place right now. Any given day, it's just discombobulated.

[00:03:33]Um and and you know the the irony is you see these rotations but it's really hard to even pick up on what the rotations happen to be. you know, I scroll and I look at uh you know, I look at some of the sectors, okay, like okay, so healthc care is down today and uh uh oh look like this is XLU which is utilities and that's down a couple of days in a row and then you know over here oh this is down and you're like look at all these down and then everybody's like well it's just technology and technology is the only thing that's not necessarily true.

[00:04:04]Interestingly enough, uh what's actually rallying a bit today happens to be financials, but nobody's wanted to touch those in weeks. So, we're seeing this lack. It's like a the way I was explaining it earlier today, very amorphous market, okay? It's like the blob. It's all over the place. But I'm actually going to give you something dramatically uh different and unique to look at.

[00:04:29]Okay. Uh this actually it sparked my curiosity. I did see uh something on X Twitter, whatever the hell you guys want to call it these days, and it sparked my curiosity two days ago, and it was actually looking at implied volatility of a strategy that I used to run, and we're talking about like forever ago, strategy I used to run called dispersion. Now, for those of you that have absolutely no idea what a dispersion, like the tactics basically are, okay, I want you to think, okay, just just don't worry about the screen right now. I want you to think about the S&P 500. Okay? Uh the S&P. Now, most people when they look at the S&P, they look at the chart. Forget about the chart. Okay? Forget about it. I want you to think about its implied volatility.

[00:05:14]The implied volatility of the S&P. A good way to do that would be to look at something like VIX. So, we look at the VIX and where is the VIX right now?

[00:05:21]You're like, that's come down a lot.

[00:05:24]Okay? A lot. A lot. like the VIX basically is sitting at or near lows if you will for the year. Now, that's again the the VIX is measuring S&P, right?

[00:05:37]S&P, which is an options only product.

[00:05:40]Volatility 30 days out, and it's like this averaging model, yada yada yada.

[00:05:44]Okay, I'm not a huge proponent of the VIX, but in this case, I think it's a great explanation. The VIX, okay, is incredibly low. Now, let me take you back to the S&P for a second. When you actually go, okay, to VIX and you're like, you're out some 30 days in the VIX, and again, I'm I'm actually going to highlight this because it's really important. We start looking at the VIX, okay? Like 15 15. So the volatility is right around 15. That's that's ABOUT 30-DAY VOLATILITY. TIME OUT. YEAH, forget that volatility. Look in the here and now. When we start talking about like the here and now, we're talking about some zero DTE. Okay, I want to see some of the really short duration options. Zero DTE is obviously indicative of an option that would expire today. Forget about today. Today is over, baby. It's over in 18 minutes.

[00:06:26]But I want you to look at next week. The volatility is eight. The volatility is nine. Volatility is 10. Do you kind of get the feeling? And this is this is kind of like an average implied volatility. You kind of get the feeling volatility really can't go where? Really can't go down very much, can it? So, for all intents and purpose, okay, I think that you could probably state like, can volatility go lower? The S&P you can get into the eight volatility. It's already pricing in an eight volatility. You know, in the S&P you can get to let's get crazier or 10 days out and it's already pricing 11 V. like it can't go much lower. Can't go much lower. So, what we need to first and distinctly look at is that index volatility is lying flat dead on the floor. Like you could literally put chalk lines around index volatility because it's so freaking dead.

[00:07:17]Contrary, okay, to that and on the other hand, look around at some of the equity products. Equities, what does that mean?

[00:07:24]stock stock stock implied volatility.

[00:07:27]Okay, it's jacked. Like here's Nvidia and Nvidia right now. Okay, it's not exactly like the most rocking thing to look at, but I brought up Nvidia. I wanted to bring up like, you know, Broadcom, okay, Broadcom. Holy crap.

[00:07:40]Like Broadcom, if you look at its implied volatility, it's so high. Okay, but it does of course have earnings coming up. So, tell you what, exclude that one for a second. I don't want to talk about earnings, okay? I want to look at stuff like Tesla like oh but Tesla Tesla's still sitting okay you know 30 days out 46 vault okay but it's still in the short duration 40 vol which is okay if Tesla's at a 40 vault and the index volatility is at a 10v think about the differential between those two okay the differential between okay equity volatility okay and index volatility okay that differential is wild right now. And the implication, and I'm going to show you, okay, a little slide deck here that I put together. The implication of this, well, is interesting. Let's get to it. Cut to the chase. Okay. What are you looking at right now? Okay. Currently at 27%, well below the 47% long run average and close to the lowest reading in the 20-year history. 2008 great financial crisis and 2020 COVID spikes stand out as the two major correlation blowups. Okay, both briefly pushing towards 80%. Right now, okay, we're the opposite extreme. What I'm actually showing you here, okay, is that index options like S&P puts are really cheap relative to single stock options. Okay, so we're looking instead of correlation factors of like one stock is up and one stock is down. Okay, we're actually looking at correlation factors, okay, of implied volatility. We're looking at SPX implied volatility, okay, versus what? Okay, SPX implied volatility versus uh again the equity volatility. The market expects stocks to move on their own idiosyncratic drivers.

[00:09:36]So what this basically means okay not in lock step the market right now the way it's actually pricing everything is that individual stocks okay are going to be their own animals okay everything's going to be their own animal like Tesla's its own animal and then and then Intel is going to be its own animal and AMD is going to be its own animal and that macro okay which is um systematic risk is priced okay as an absolute baseline low you're like what the hell does that mean let's let's talk about macro risks economic data. Have you noticed that like PCE data came out yesterday and PCE data and GDP data came out yesterday?

[00:10:12]Nobody gave two beeps about any of the data that actually came out yesterday morning. You know why? Because the market is expecting stocks to actually move the market. Okay? And that the indices uh don't mean a damn thing right now. This is crazy. And it's really crazy when you actually graph like literally what you're looking at right now is you're looking at one of the implied volatilities, okay, which is stock implied volatility, okay, and put against index volatility. And what does it do? Okay, it's the absolute lows by far and away in the last 20 years an absolute low. Okay, and sooner or later like this is absolutely 100% mean reverting. Plain and simple. This is actually something that every dispersion tactic trader would be looking at. And dispersion tactics are basically traders that come in and what they often do in dispersion tactics is they sell, okay, the living crap out of short duration S&P options. Like if you look at S&P options, okay, tons of firms are coming in there and they just sell, okay, S&P options, and then they take all the money, okay, from the sale of the S&P options. that I'm really watering dispersion down, but they're selling huge amounts of S&P options and then turning around. Okay. And buying what?

[00:11:27]Uh stocks, stock options. Okay. So, it's like sell a thousand straddles or sell a thousand strangles in the S&P. But right now, when you're selling S&P, what are you selling? YOU'RE SELLING ROCK BOTTOM PEOPLE. YOU'RE selling crap. You're selling 10 vault. And then they're turning around and taking that money and applying it, okay, to stock, okay, stock. And stocks are like three and four times that implied volatility. So your money's not going that far, okay?

[00:11:55]And what's actually going on? It's suppressing the volatility, okay, in the macro marketplace. It's suppressing S&P volatility. This is actually NDX. I actually wanted to show NDX, too. NDX is also rock bottom. Okay, the conclusions.

[00:12:09]Low implied volatility correlation is the foundation to the dispersion trade.

[00:12:13]Sell index volatility which is I mean really low right now. Buy single stock volatility it's relatively expensive. So index volatility relatively cheap.

[00:12:22]Single stock volatility relatively rich.

[00:12:24]Hedge funds okay run this constantly.

[00:12:27]All right. It also signals that active stock picking should have a higher hit rate since stocks okay are being rewarded okay or punished on their own merits rather than moving with the index. So not only okay the implications of this not only are like the indices are moving right now and the indices are moving but the stocks are moving okay in a larger okay and should be moving in a dramatically larger fashion but the historic low is notable because the correlation tends to be mean reverting every time it has reached these levels in the past it has eventually snapped back typically okay during the next riskoff event when everything sells off together again what you need to be on your game for okay we have actually hit this like record low number just hitting a record low number doesn't mean a damn thing okay but the other factors in the marketplace right now these are not good you have VIX okay which actually dropped you're getting no price action out of the VIX the VIX is the volatility of the VIX itself okay this is indicating no macro events are coming right now nobody's scared nobody's even hedging okay nobody has hedges on let me actually finish this one off okay and the third thought if you actually look at skew. Okay, skew is freaking low.

[00:13:37]It's really low relative to where it's actually been. Okay, any one of these factors alone, nobody gives a crap.

[00:13:43]Like, oh, the skew is low. Who cares?

[00:13:46]Oh, the VIX is really low. No, the VIX is really low. Okay, and again, I'm stressing that VIX is really low. Okay, in fact, okay, when you start looking at the VIX and and recognizing the VIX is the lowest it's been, okay, year to date. And this is indicative of like, oh, the VIX can't move. So immediately when people start putting these factors together, okay, there's one conclusion.

[00:14:07]You're on the clock right now. You're on the clock. Okay, for all of a sudden the marketplace is going to snap. Okay, and volatility you're like is going to explode. So you're thinking of the volatility trade. Don't because I'm going to tell you right now, the volatility futures are already showing 54 days out. VIX is already pricing back to 20. You realize that the present VIX, okay, is at 15. They're already pricing VIX 54 days out. Okay, back to 20. 82 days out back to what 2075 there is a huge okay huge contango right now not a backwardation a contango the exact opposite is dangerous time it's a very very dangerous time in here first rule of thumb do not dare sell an index option right now you sell an index option you die okay you sell index options you sell iron condors I don't give a crap whether they're defined risk or not you die in that trade okay you got to Keep your head in the game, people. This is going to get uh this going to get wild. One of the ways that uh we're actually going to take a trade.

[00:15:07]Well, I'm going to proposition a couple of uh ideas, okay? I'm going to do that literally on Monday morning. On Monday morning, I'm going to be talking about this extensively inside of the trade chat room live. That's my first topic on Monday morning because I am sure on this weekend update I've created a dramatic mess. People are like index volatility is low. Yeah, and stock volatility is high. I mean here another example. Go look at Intel. Okay, this one's actually quite awe inspiring in fact. Okay, I enjoy doing this. Take Intel.

[00:15:38]Go to ad study. Go to volatility studies. Just pop up like implied volatility. Okay, you can see that Intel implied volatility is high. But then I want you to take it and put it to a max chart. Okay, implied volatility is only recorded so far back here. I'll do it 15 years. You do realize that Intel has the stock is actually exploding higher. has the highest implied volatility, okay, that it's basically ever had. And you can go through and you can start looking at stuff like AMD. Okay, AMD, not quite the highest volatility because the stock almost went out of business back here, but pretty damn close. Point that I'm trying to make again, okay, volatilities, they're raging right now.

[00:16:14]Absolutely raging. And with volatilities raging, okay, in individual stocks, but the exact opposite, and literally the exact opposite, happening in the index marketplace, you got yourself, okay, a little bit of a mess. Let's come back over here to my scratch pad. All right, so we talked a little bit about the lowest correlation in history, but it's not the correlation you're thinking, okay, it's index volatility suppression.

[00:16:36]It's like throwing a wet blanket, okay, over a good party, and it's only going to happen for so long before that marketplace gets all kinds of crazy. I did want a brief mention, okay, on oil.

[00:16:47]Okay, brief mention on oil. I'm just going to throw it out there. I took a uh pretty significant bullish position in oil. I think oil is still going to rip.

[00:16:56]Um again, I explained that in quite some detail in the Theo trade room, and I'll explain it again, of course, uh on Monday, but I took a bullish position inside of oil specifically. I felt it easier for most retail clients to take that position specifically inside of the USO. I'm 49 days out. Okay, let's get ready to rumble inside of oil. And of course, okay, which we'll be talking about next week, June 4th, the PDT rule is eliminated. Pattern day trader rule is going to be eliminated. Not every single brokerage firm, okay, is going to eliminate on the exact same day, but I'll keep you guys uh, you know, really up to date, okay, on everything that I know about the pattern day trader rule being eliminated. So, I know a lot of people are like, it's going to be crazy.

[00:17:37]It's not going to change anything, okay?

[00:17:39]People are going to get a little bit more crazy with some index options and some uh some equity options. I mean, hell, it's already crazy right now.

[00:17:46]Already trading the 70 75 million contracts a day in options. Okay, it's only going to pick it up a little bit more. All right, last but definitely not least, we go to the S&P, the mother of all products. And as I said about the mother of all products, look at that crap. Okay, we're seconds away from the closing bell sitting on a line that this geek drew, okay, last weekend. So remember what I said, don't sell. I mean, if there's one theme here, do not dare sell index volatility. I don't it is you're hitting rock bottom, okay?

[00:18:17]Versus, okay, equity volatility that's basically skyhigh. That is a really, really bad mess because what's going to happen is the typical dispersion trade is going to invert. Okay? The exact opposite is going to happen. The index product is going to take over and volatility is going to explode. And I'm telling you, the market is already pricing this in this week. Okay, this week we had exactlyundred, okay, and $114 expected move. And I just want to draw this up here because it's a 4-day trading week and we had $114 expected move. So, what are we looking at for next week? I mean, this week the $114 move, it happened. We're basically up like 114 bucks right now. Next week, I found this interesting. We're only pricing to a $100 expected move. So, what does that mean? Well, first of all, next week is a fiveday trading week. So, you have an extra day and the implied volatility is lower. Once again, that also, okay, reiterates, don't sell index volatility. Okay? You got to look for correlation to start to return. you're going to look at things and you know the correlation I'm talking about yes it deals with implied volatility but it has implications right here where all of a sudden instead of this 5050 slopfest market snap back into alignment all right that is it for this weekend's updates thanks everybody for joining us here at theotrade don't miss Monday morning theotrade chat room I want to explain a little bit more about this more importantly how to trade it thanks everybody have a great weekend bye-bye