| Submission declined on 14 January 2024 by Robert McClenon (talk). The proposed article does not have sufficient content to require an article of its own, but it could be merged into the existing article at Correlation trading. Since anyone can edit Wikipedia, you are welcome to add that information yourself. Thank you.
Where to get help
How to improve a draft
You can also browse Wikipedia:Featured articles and Wikipedia:Good articles to find examples of Wikipedia's best writing on topics similar to your proposed article. Improving your odds of a speedy review To improve your odds of a faster review, tag your draft with relevant WikiProject tags using the button below. This will let reviewers know a new draft has been submitted in their area of interest. For instance, if you wrote about a female astronomer, you would want to add the Biography, Astronomy, and Women scientists tags. Editor resources
|  |
Comment: After five days, the only reply at the project page is by the originator, and is too technical to be useful to those who are not students of financial trading. Please either expand the article and resubmit, or include this content in Dispersion trading, or discuss at Talk:Correlation trading. Robert McClenon (talk) 06:54, 14 January 2024 (UTC)
- Comment: A request has been made for review at WikiProject Finance & Investment. Robert McClenon (talk) 06:17, 8 January 2024 (UTC)
- Comment: There is currently a redirect from the title of this draft to a related topic. If this draft is being accepted, please check this draft and the targeted article to ensure that there are appropriate cross-references.You may ask about redirects at the Teahouse.There is a redirect from Dispersion trading to Correlation trading. How are these strategies either different or the same? Robert McClenon (talk) 06:13, 8 January 2024 (UTC)
 | This article may be too technical for most readers to understand. (January 2024) |
Dispersion trading is a strategy used in options trading that focuses on exploiting the difference in volatility between an index and the individual stocks within it. This approach bets on the gap between the implied volatility of index options and that of single stock options.[1] Traders engage in this strategy by shorting the volatility of an index while going long on the volatility of its constituent stocks.
Understanding Dispersion Trading edit
At its core, dispersion trading revolves around the divergence in anticipated volatility between options on an index and options on individual stocks within that index. The crux lies in the observed discrepancy: index options typically exhibit lower implied volatility compared to the volatility seen in individual stock options. This gap presents unique opportunities for traders to capitalize on the resulting spread variations.[2]
Central to the effectiveness of dispersion trading is grasping the nuances of Option-Implied Correlations.[3] These correlations shed light on the degree to which individual stocks are expected to mimic the movements of their respective index. High correlations suggest stocks moving in tandem with the index, creating fewer chances for successful dispersion trades. Conversely, low correlations, hinting at individual stock movements deviating from the index trend, set the stage for lucrative dispersion trading opportunities.
The Appeal and Mechanics of Dispersion Trading edit
Dispersion trading is increasingly recognized as a strategy for traders looking to beat the market.[4] Its premise is simple, despite the perceived complexity. At its heart, dispersion trading takes advantage of the fact that an index's volatility is usually less variable than that of its individual stocks, a result of diversification. While individual stocks may fluctuate widely, the index generally maintains more stability.
However, market forces often raise the expected correlation among stocks, giving the impression of increased index volatility.[5] Traders, especially in hedge funds and trading desks, see this as an opportunity. They bet against the index's volatility while supporting the volatility of individual stocks, aiming to profit from the index's perceived overvalued volatility.
Imagine an index with just two stocks moving in unison. Their perfect correlation means the index volatility directly reflects the stocks. On the other hand, if the stocks move oppositely, the index shows no volatility. Dispersion traders analyze such scenarios to inform their strategies. Dispersion trading capitalizes on the tendency to overestimate the correlation between stocks in the market. This overestimation, often pushed by structured product sellers who prefer long correlation positions, makes index volatility seem higher than it is.[6]
In long dispersion[7] trades, traders short index volatility while going long on individual stock volatility. This strategy counters the market's common assumption about implied correlation. While dispersion trading is a common approach to trading implied correlation, its effectiveness also depends on overall market volatility. It's essentially about trading the index's correlation, calculated through specific financial models.
References edit
- ^ Deng, Qian (2008). "Volatility Dispersion Trading". SSRN Electronic Journal. doi:10.2139/ssrn.1156620. ISSN 1556-5068. S2CID 167745092.
- ^ Vonhoff, Volker (2006). "Dispersion Trading". SSRN Electronic Journal. doi:10.2139/ssrn.1889147. ISSN 1556-5068. S2CID 219347030.
- ^ "Dispersion Trading Strategies - THETA TITANS". 2023-12-05. Retrieved 2024-01-07.
- ^ Ferrari, Pierpaolo; Poy, Gabriele; Abate, Guido (2019-03-06). "Dispersion trading: an empirical analysis on the S&P 100 options". Investment Management and Financial Innovations. 16 (1): 178–188. doi:10.21511/imfi.16(1).2019.14. ISSN 1810-4967.
- ^ Schneider, Lucas; Stübinger, Johannes (2020-09-20). "Dispersion Trading Based on the Explanatory Power of S&P 500 Stock Returns". Mathematics. 8 (9): 1627. doi:10.3390/math8091627. ISSN 2227-7390.
- ^ Marshall, Cara M. (2009). "Dispersion trading: Empirical evidence from U.S. options markets". Global Finance Journal. 20 (3): 289–301. doi:10.1016/j.gfj.2009.06.003. ISSN 1044-0283.
- ^ "Dispersion Trading Strategies - THETA TITANS". 5 December 2023.
- in-depth (not just passing mentions about the subject)
- reliable
- secondary
- independent of the subject
Make sure you add references that meet these criteria before resubmitting. Learn about mistakes to avoid when addressing this issue. If no additional references exist, the subject is not suitable for Wikipedia.