About – Power Correlations Indicator

Quickly and easily manage your portfolio’s correlation against Indexes, ETF’s and Stocks with the ST Power Correlations Indicator in TOS!

ST Power Correlation

Overview: 

This tool will help you to quickly visualize how well your portfolio is correlated to ETF’s, Sectors, individual Stocks and Indexes in which the stocks or options are trading. This is a necessary step for all traders who want to understand portfolio risk and construct hedges accordingly. For most traders, their first question is when it comes to hedging is WHAT should I buy? And the second questions is HOW MANY? The Power Correlations tool is designed to allow you to see how your position on a stock will be affected by movement in a correlated ETF as well as how and what to trade in another ETF to help manage your potential risk. 

Examples: 

With no hedges in place, it is easy for a portfolio to get whacked when the market takes a hit. By identifying how much unallocated cash you have and how much of your portfolio is dedicated to each area i.e. stock,  ETF, etc. you can easily gauge whether you are positioned properly for all market conditions. Once you have identified your positioning in the market, you are ready to determine the best hedges based on current market conditions. 

Taking a look at a couple of examples here with calls.For a trader owning 1 call option on FB, GOOGL, NVDA and AVGO, their portfolio is correlation to the QQQ by 70%. In other words, if the QQQ drops by 1% then your portfolio value will fall by 7/10ths of a percent based on its correlation to the ETF.

A way to hedge yourself against this drop in value would be to add In-the-Money Calls to your portfolio for FXY. You then have a correlation of 0 since this position offsets the QQQ correlation. This is because the QQQ dropping by 1% would potentially be offset by the FXY call value increase.

Thinkorswim View:

Tradestation View:

Wrap Up:

With this unique tool, you have the opportunity to quickly and easily manage your positions to keep your portfolio in the best shape possible. Keying off of identifiable correlations between what you are trading and what the rest of the market is doing is an absolute must whether you are a seasoned trader or just starting to build your account. If you are interested in learning more about this cool tool and how to develop strategies around what it is telling you, check out the class link below

See also ETF Haystack Options Methods Class