Correlation trading
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(Redirected from Dispersion Trading)
In finance, correlation trading is a strategy in which the investor gets exposure to the average correlation of an index.
The key to correlation trading is understanding the principle of diversification -- that the volatility of a portfolio of securities is less than (or equal to) the volatility of a single security in that portfolio. The lower the correlation among the individual securities, the lower the overall volatility of the entire portfolio.
To buy correlation, investors can:
- buy a portfolio of options on the index and sell a portfolio of options on the individual constituents of the index.
- buy a variance swap on the index and sell the variance swaps on the individual constituents.
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