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News Link • Economy - International

The Dispersion Trade

• arclein

What a lot of people don't know is that there is a mathematical relationship between index options and options on the constituent stocks that comprise the index. As it turns out, index options tend to be chronically overpriced, so there is money to be made by selling index options and buying single-stock options, dynamically hedging along the way. The math behind this is all pretty complicated. The dispersion trade has been around for a while, but in the early days, it wasn't easy to effect because of wide bid-ask spreads. There were a few floor market-makers that tra

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