Correlation Between Equity Income and Secured Options

Can any of the company-specific risk be diversified away by investing in both Equity Income and Secured Options at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Equity Income and Secured Options into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Equity Income Portfolio and Secured Options Portfolio, you can compare the effects of market volatilities on Equity Income and Secured Options and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Equity Income with a short position of Secured Options. Check out your portfolio center. Please also check ongoing floating volatility patterns of Equity Income and Secured Options.

Diversification Opportunities for Equity Income and Secured Options

0.95

Correlation Coefficient

Equity Income  Secured Options

Almost no diversification

The 3 months correlation between Equity and Secured is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Equity Income Portfolio and Secured Options Portfolio in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Secured Options Portfolio and Equity Income is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Equity Income Portfolio are associated (or correlated) with Secured Options. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Secured Options Portfolio has no effect on the direction of Equity Income i.e., Equity Income and Secured Options go up and down completely randomly.

Pair Corralation between Equity Income and Secured Options

Assuming the 90 days horizon Equity Income Portfolio is expected to under-perform the Secured Options. But the mutual fund apears to be less risky and, when comparing its historical volatility, Equity Income Portfolio is 1.13 times less risky than Secured Options. The mutual fund trades about -0.17 of its potential returns per unit of risk. The Secured Options Portfolio is currently generating about -0.09 of returns per unit of risk over similar time horizon. If you would invest  1,491  in Secured Options Portfolio on October 15, 2024 and sell it today you would lose (120.00) from holding Secured Options Portfolio or give up 8.05% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Strong
Accuracy	100.0%
Values	Daily Returns

Equity Income Portfolio  vs.  Secured Options Portfolio

Equity Income Portfolio

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Equity Income Portfolio has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's forward indicators remain fairly strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Secured Options Portfolio

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Secured Options Portfolio has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Equity Income and Secured Options

The main advantage of trading using opposite Equity Income and Secured Options positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Equity Income position performs unexpectedly, Secured Options can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Secured Options will offset losses from the drop in Secured Options' long position.

The idea behind Equity Income Portfolio and Secured Options Portfolio pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..