Dispersion Trade
An institutional options structure that goes SHORT variance on an equity index and LONG variance on a basket of the index constituents, weighted to track the index. The trade isolates a bet on CORRELATION: it profits if realized correlation across the basket comes in below the implied correlation embedded in option prices. The structure requires multi-leg execution across many underlyings and is operationally complex; it is the canonical example of a vol-arbitrage trade that retail cannot replicate but should understand conceptually.
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Related terms
American Option · Asian Option · Barrier Option · Basket Option · Butterfly Spread · Calendar Spread
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