A dispersion trade is an options strategy that profits from the difference between implied volatility of an index and the average implied volatility of its individual components. Traders either sell index volatility and buy single-stock (or single-asset) volatility, or vice-versa, depending on their expectation of future correlation among the underlying assets. In crypto, this applies to baskets of digital assets and their respective derivatives.
Mechanism
This trade structure typically involves selling an index option (e.g., an option on a crypto index) while simultaneously buying a portfolio of options on the constituent digital assets. The profit mechanism relies on the expectation that the realized volatility of individual components will deviate significantly from the realized volatility of the aggregated index. It is a statistical arbitrage strategy exploiting mispricing of correlation.
Methodology
The methodology for executing a dispersion trade requires accurate pricing models for both index and individual asset options, coupled with real-time correlation analysis. Institutional traders monitor implied versus realized correlation metrics to identify opportunities. Risk management focuses on monitoring changes in correlation dynamics, hedging directional exposure, and adjusting positions as market conditions or constituent volatilities shift.
Dispersion trading effectively extends beyond equities by systematically isolating correlation risk in any asset class with liquid index and component options.
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