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Correlation delta (cega) measures an option's price sensitivity to changes in the correlation between underlying assets. It is relevant for multi-asset derivatives like basket options, rainbow options, and index options where component correlation drives pricing.
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Key takeawayWhen correlations spike to 1 during a crash, index vol converges toward single-stock vol levels. Premium sellers who rely on the index diversification discount should understand that this discount disappears precisely when they need it most.
💡 Why It Matters
Correlation delta matters for premium sellers managing portfolios of short premium across multiple underlyings. When correlations spike during a selloff, all your positions lose simultaneously, and the diversification you assumed evaporates.
⚙ How It Works
Correlation delta measures how an option's price changes when the correlation between underlyings changes. For index options, an increase in correlation raises index vol (making short index positions lose). For worst-of basket products, an increase in correlation decreases the price (making short positions win).
📋 Example
A portfolio of short strangles across 20 uncorrelated stocks has a correlation delta of -$200. This means for each 0.01 increase in average pairwise correlation, the portfolio loses $200. During a market panic when correlation jumps from 0.30 to 0.80, the correlation effect alone produces a $10,000 loss on top of directional and vega losses.
⚠ Common Mistakes
Traders build diversified premium-selling portfolios across many names and assume they have reduced risk. Correlation delta shows that diversification is not free insurance. When you need it most (during panics), correlations spike to near 1.0 and your diversification benefit disappears, concentrating losses.
❓ FAQ
What is Correlation Delta?
Correlation delta (cega) measures an option's price sensitivity to changes in the correlation between underlying assets. It is relevant for multi-asset derivatives like basket options, rainbow options, and index options where component correlation drives pricing.
Why does Correlation Delta matter for premium sellers?
When correlations spike to 1 during a crash, index vol converges toward single-stock vol levels. Premium sellers who rely on the index diversification discount should understand that this discount disappears precisely when they need it most.
How does Correlation Delta work?
Correlation delta measures how an option's price changes when the correlation between underlyings changes. For index options, an increase in correlation raises index vol (making short index positions lose). For worst-of basket products, an increase in correlation decreases the price (making short positions win).
What are common mistakes with Correlation Delta?
Traders build diversified premium-selling portfolios across many names and assume they have reduced risk. Correlation delta shows that diversification is not free insurance. When you need it most (during panics), correlations spike to near 1.0 and your diversification benefit disappears, concentrating losses.
Related Terms
Charm
The rate at which delta changes as time passes (∂Δ/∂t), also called delta decay.
Color
The rate of change of gamma with respect to time.
Delta
The rate of change in an option's price for a $1 move in the underlying stock.
Delta Hedging
Trading the underlying asset to offset an options position's directional exposure.
This is not financial advice. Read our full investment disclaimer.