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Over the last few years, the popularity of correlation and relative value trading has remained strong and profitable for many traders.  This trend is likely to continue as the world emerges from a pandemic, economies open, and companies emerge from the crisis in different ways.

Dispersion and correlation skew trades capture the relative mispricing between implied correlations calculated off implied volatilities of index options and the implied volatilities of options written on the index components.

In brief, typically the trade is set up to sell the implied volatility of the index and buy the implied volatility of the components since the index implied volatility usually contains risk premium and the individual stocks could exhibit idiosyncratic shocks that can be monetized by Gamma hedging.

The main data points needed for modeling and back-testing are

  • ATM implied volatilities of the index and of the individual constituents
  • Implied volatilities at various skew points (e.g., at 10, 25, 35, 65 Delta)
  • Strikes and Greeks (Delta, Theta, Vega)
  • index and stock prices

Data frequency could be both end-of-day and intraday.

SpiderRock offers a variety of data sets that can be used to investigate and test dispersion strategies.

Please contact us for more information.