If you are Long Dispersion you are Long Volatility and Short Correlation
Trading dispersion is basically the same as trading correlation, whereby you are trading an aggregate against it's components. After trading volatility, skew and term structure you may have gotten bored and need a new technique - this technique is dispersion trading.
Being long dispersion is tantamount to being short correlation but also long volatility as assuming ceteris paribus, if the volatility of the components goes up, the investor profits.
Long Dispersion Refers to "The Long Volatility Setup"
Dispersion is really a special case of volatility trading, whereby you offset a position in the volatility of a basket of stocks (or other assets) against the volatility of the basket itself. Specifically, you short the basket volatility and buy up volatilities of the components. So when volatility increases in the components, the loss on the short will be outweighed by the gain on the components.
Stronger the Negative Correlation the Lower the Basket Volatility, So More Profit
The greater the inverse correlation of the components, the more the volatilities of the components will offset each other and bring down the corresponding basket volatility, so the basket itself moves less than the components.
Trading dispersion is basically the same as trading correlation, whereby you are trading an aggregate against it's components. After trading volatility, skew and term structure you may have gotten bored and need a new technique - this technique is dispersion trading.
Being long dispersion is tantamount to being short correlation but also long volatility as assuming ceteris paribus, if the volatility of the components goes up, the investor profits.
Long Dispersion Refers to "The Long Volatility Setup"
Dispersion is really a special case of volatility trading, whereby you offset a position in the volatility of a basket of stocks (or other assets) against the volatility of the basket itself. Specifically, you short the basket volatility and buy up volatilities of the components. So when volatility increases in the components, the loss on the short will be outweighed by the gain on the components.
Stronger the Negative Correlation the Lower the Basket Volatility, So More Profit
The greater the inverse correlation of the components, the more the volatilities of the components will offset each other and bring down the corresponding basket volatility, so the basket itself moves less than the components.
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