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

0.4

Correlation Coefficient

Equity Income  Secured Options

Very weak diversification

The 3 months correlation between Equity and Secured is 0.4. 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 generate 3.29 times more return on investment than Secured Options. However, Equity Income is 3.29 times more volatile than Secured Options Portfolio. It trades about 0.25 of its potential returns per unit of risk. Secured Options Portfolio is currently generating about 0.43 per unit of risk. If you would invest  1,406  in Equity Income Portfolio on April 25, 2025 and sell it today you would earn a total of  168.00  from holding Equity Income Portfolio or generate 11.95% return on investment over 90 days.

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

Equity Income Portfolio  vs.  Secured Options Portfolio

Equity Income Portfolio

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Income Portfolio are ranked lower than 19 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak forward indicators, Equity Income may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Secured Options Portfolio

Risk-Adjusted Performance

Very Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Secured Options Portfolio are ranked lower than 34 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Secured Options may actually be approaching a critical reversion point that can send shares even higher in August 2025.

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.

Check out your portfolio center.

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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.