The implied correlation index measures the average expected correlation between individual stocks within an index, as derived from the prices of index options and individual stock options. When index implied volatility is high relative to the weighted average of individual stock implied volatilities, it indicates that the market expects stocks to move together — high implied correlation. Conversely, low implied correlation suggests the market expects more stock-specific, idiosyncratic movements rather than broad market moves. The CBOE Implied Correlation Index (ICJ) is the most widely referenced such measure globally. For Indian markets, implied correlation can be estimated from Nifty 50 options and the options on its major constituents. Dispersion traders use implied correlation as the primary signal for identifying entry points into dispersion trades on Indian indices.
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