What is a dispersion option?
Dispersion trading consists of taking a position in an index option and the opposite option stance in all the index components. Effectively, by selling the former and buying the latter traders are placing opposite trades on the volatilities of an index and its components and therefore gaining exposure to correlation.
What is dispersion in the stock market?
In finance and investing, dispersion usually refers to the range of possible returns on an investment. It can also be used to measure the risk inherent in a particular security or investment portfolio.
What is a geometric dispersion trade?
Otherwise known as geometric dispersion trades, covariance swaps pay investors the mean realised variance between two variables, such as Nikkei-SPX, HSCEI-SPX and HSCEI-SX5E.
What is dispersion in volatility?
Practical applications. Volatility dispersion strategies involve selling volatility on the index and buying volatility on the components, traditionally using at the money (ATM) straddles. A problem with this approach, however, is that as the orginal ATM options move out-of-the-money, they lose their vega exposure.
What are straddle prices for stocks?
A straddle is an options strategy involving the purchase of both a put and call option for the same expiration date and strike price on the same underlying security. The strategy is profitable only when the stock either rises or falls from the strike price by more than the total premium paid.
How do you trade correlation?
To sell correlation, investors can:
- Sell a call option on the index and buy a portfolio of call options on the individual constituents of the index.
- Sell a variance swap on the index and buy the variance swaps on the individual constituents; this particular kind of spread trade is called a variance dispersion trade.
What is the need of studying dispersion?
While measures of central tendency are used to estimate “normal” values of a dataset, measures of dispersion are important for describing the spread of the data, or its variation around a central value. Two distinct samples may have the same mean or median, but completely different levels of variability, or vice versa.
What are the three types of dispersion?
- Uniform dispersion. In uniform dispersion, individuals of a population are spaced more or less evenly.
- Random dispersion. In random dispersion, individuals are distributed randomly, without a predictable pattern.
- Clumped dispersion. In a clumped dispersion, individuals are clustered in groups.
Can you lose money on a straddle?
Potential loss is limited to the total cost of the straddle plus commissions, and a loss of this amount is realized if the position is held to expiration and both options expire worthless. Both options will expire worthless if the stock price is exactly equal to the strike price at expiration.
Are AUD and NZD correlated?
Similarly, Australia (AUD) and New Zealand (NZD) have a close relationship to gold prices and oil prices. While the correlations (positive or negative) can be significant, if forex traders want to profit from them, it’s important to time a “correlation trade” properly.
Do all GBP pairs move together?
While the pairs won’t always move in exactly the same direction, they do move mostly together. In comparison, the GBP/USD and EUR/GBP have a strong negative correlation at -90, meaning they move in opposite directions much of the time.