Implied Correlation Divergence Oscillator

The Implied Correlation Divergence Oscillator indicator provides a unique perspective on CBOE Implied Correlation signals by identifying divergences from a filtered trend to spot overbought/oversold conditions and dispersion opportunities.

Usage

The Usage section describes how the script can be used to interpret market sentiment and potential volatility shifts. Users can utilize the oscillator to:

• Identify Trend Extremes: Detect overbought or oversold trends based on the distance between the raw Implied Correlation (IC) signal and its moving average.
• Dispersion Opportunities: Find potential zero-delta straddle plays or relative value opportunities between indices (like the S&P 500) and their underlying components.
• Signal Interpretation: The oscillator fluctuates around a zero bound. Values above zero (green) indicate bullish divergence, while values below zero (red) indicate bearish divergence.

Details

The Implied Correlation Divergence Oscillator (ICDO) functions as a low-pass filter by applying a Simple Moving Average (SMA) to a selected Implied Correlation symbol. The script calculates the divergence by subtracting the current IC signal from its SMA ($Divergence = SMA - Signal$). By focusing on the variance between the expectation (the MA) and the current value, the tool aims to refine the signals provided by the Chicago Board Options Exchange (CBOE). The visualization uses a gradient color scheme to highlight the strength of the divergence.

Settings

IC Selection

• COR Symbol: Selects the specific CBOE Implied Correlation index to track. Options include various tenors such as COR1M, COR3M, COR1Y, and specific day counts like COR10D or COR90D.

General Settings

• MA Length: Determines the lookback period for the Simple Moving Average. This acts as the low-pass filter; longer lengths typically produce higher magnitude divergences and a smoother signal, while shorter lengths are more sensitive to immediate fluctuations.

FAQ

How do I interpret the colors of the columns?

The columns are color-coded based on their position relative to the zero line. Green columns represent positive divergence (bullish), while red columns represent negative divergence (bearish). The transparency gradient reflects the intensity of the signal relative to historical peaks and troughs.

What symbols are best to use with this oscillator?

The oscillator is designed to work with Implied Correlation indices (COR). Users typically match the tenor of the COR symbol (e.g., COR3M for 3-month correlation) with their specific trading horizon or option expiration targets.

How can I access the Implied Correlation Divergence Oscillator?

You can get access on the LuxAlgo Library for charting platforms like TradingView, MetaTrader (MT4/MT5), and NinjaTrader for free.