From: Wall Street
The core of dispersion trading is to make a profit by taking advantage of the volatility differences between indices and individual stocks. Citigroup estimates that assets using this strategy have grown at least in the past three years.Rovexbigboss36000priceDouble, maybe even double.
Niche stock trading, once favored by hedge funds and volatile investors, has become one of the most popular options strategies on Wall Street.
This investment strategy is known as dispersion trading (Dispersion Trading): selling options on a wide-base stock index such as the NASDAQ 100 while buying options on individual components of the index, such as Nvidia or Tesla.
The core of this strategy is to make a profit by taking advantage of the volatility differences between indices and individual stocks. The ideal condition for trading is that the price of individual stocks fluctuates sharply (the value of individual stock options is higher), but their overall ups and downs offset each other, keeping the index stable (the value of index options decreases).
The volatility of individual stocks is higher than that of index, which means that it is cheaper to hedge index options with individual stock options, which creates arbitrage space for investors. The average volatility of S & P 500 stocks relative to the entire index is at its highest level since at least 2011, according to data compiled by Societe Generale.
At least double in three years
Traditionally, the strategy has been dominated by "fast money" players such as bank trading desks and hedge funds, but it has been favored by more and more investors in the post-epidemic era.
Guillaume Flamarion, head of Citigroup's American multi-asset group, estimates that the number of assets using the strategy has at least doubled, maybe even tripled, in the past three years.
According to a survey of 18 banks by financial technology company PremiaLab, the number of quantitative investment strategies (QIS) for discrete trading has jumped 75% to more than 50 since the end of 2021.
Dispersion trading continues to grow because it is seen as a more affordable form of portfolio insurance.
According to Xavier Folleas, head of QIS at BNP Paribas, individual stock options bought in discrete trading will rise in value when stocks tumble, but it can make some gains by selling index volatility even when the market is calm.
Finally, Folleas concluded: "dispersion trading is really the best option."
The growing influx of money into discrete trading is just a microcosm of the growth of the US options market. In fact, the overall trading volume of the US options market has doubled since 2019.
It is worth mentioning that the increase in the size of the dispersion strategy coincides with the decline in index volatility, indicating that the dispersion strategy itself may be one of the reasons for the decline in volatility.
The US stock "panic index"-the Chicago Board options Exchange volatility Index (VIX), which tracks the cost of S & P 500 options, hit a five-year low on Thursday, indicating weak demand for hedging.
The cost has reached a 13-year high, can we still enter the dispersion strategy now?Rovexbigboss36000price?
However, the expansion of dispersion trading has also raised some concerns, such as eroding the arbitrage space at its core.
With investors betting that this model will continue, the cost of entering the strategy is now at its highest level in at least 13 years, raising the bar for future money.
As Vincent Cassot, head of derivatives strategy at Societe Generale, puts it: "it is a bit of a victim of its own success. It is very difficult for this kind of transaction to continue to be profitable. "
But if the "Seven Sisters" era continues, the deal will still be profitable in theory.
Unlike large-cap blue chips such as General Electric or Procter & Gamble in the past, American blue chips now often give investors a roller coaster experience. Companies such as Nvidia, Tesla and Meta have all experienced at least 10 per cent daily volatility in recent months, providing investors with dispersion strategies with the volatility they crave.
In addition, because these fluctuations are largely special, the correlation between S & P 500 stocks has also fallen to its lowest level in at least 13 years, which also helps dispersion trading, according to Bloomberg data.
"there are fewer opportunities to evaluate it now than it was two years ago," says Citigroup's Flamarion. But people still keep it in their portfolios. "