what correlation can tell you
correlation shows the strength of a relationship between two variables and is expressed numerically by the correlation coefficient the correlation coefficient s values range between 1 0 and 1 0 a perfect positive correlation means that the correlation coefficient is exactly 1 this implies that as one security moves either up or down the other security moves in lockstep in the same direction a perfect negative correlation means that two assets move in opposite directions while a zero correlation implies no linear relationship at all for example large cap mutual funds generally have a high positive correlation to the standard and poor s s p 500 index or nearly one small cap stocks tend to have a positive correlation to the s p but it s not as high or approximately 0 8 however put option prices and their underlying stock prices will tend to have a negative correlation a put option gives the owner the right but not the obligation to sell a specific amount of an underlying security at a pre determined price within a specified time frame put option contracts become more profitable when the underlying stock price decreases in other words as the stock price increases the put option prices go down which is a direct and high magnitude negative correlation 