Illusions of arbitrage

Dispersion trading / Retro synthwave edition

Dispersion trading, a topic intricate yet fundamental to modern options markets, carries a mystique for many, but those who have spent any length of time beneath the tumultuous surface of index trading will recognize in it the heartbeat of a thousand strategies, iterations, and lessons learned, sometimes the hard way. On a recent bright afternoon, I sat with a friend whose mathematical intuition for volatility and correlation underpins both his trading and his teaching–and whose ability to reduce complexity to a simple narrative rivals any market storyteller I know.

The conversation began, as so many do in this world, with a half-joked recollection of youthful trading misadventures and the challenges in explaining what, exactly, dispersion trading is. You see, at its core, dispersion trading means betting on the relative volatility of an index versus its individual components.

Flows bend the correlation curve. Long-end hedging demand lifts index vol relative to single stocks, raising long-tenor implied correlation. Source : Quant insider