I have written quite a bit about the potential accident that is looming in the dispersion trade. Before we jump in, h/t to
for the trade idea below which he texted me about on the weekend.So what is the dispersion trade? There are many ways to express this, and I will try to keep this as simple as possible. The trade is an RV expression between single name volatility, and index volatility. The premise is that individual companies have more event risk, idiosyncratic risk, jump risk and illiquidity risk and such they should demand a higher vol premium than the index. Effectively, by buying a basket of options on single name stocks, and selling index options, you capture these additional moves. This trade has been very popular and successful in the last 15 months, and now it is even being discussed on podcasts and news articles (see Bloomberg odd lots for a discussion on it).