An under-the-radar options trade beloved by hedge funds pouncing on stock dislocations is entering the mainstream.
The Cboe S&P 500 Dispersion Index , created to capture the difference in prices of options between the equity gauge and its underlying constituents, made its debut Wednesday. Cboe Global Markets says it aims to list a futures product tied to the new offering by the second quarter of next year.
There are a number of funds specializing in dispersion trading, including the Fulcrum Equity Dispersion Fund and the Systematic Dispersion Fund. In simplest terms, the trade is a bet on how much benchmark gauges will swing around relative to the volatility of stocks that make up the indexes. In practice, it’s far more complicated with derivatives such as volatility swaps and over-the-counter instruments often employed.
Cboe is confident that the offering will find demand on Wall Street as it offers a simple way to gauge how company-specific risks are stacking up versus the market. Its futures contracts can become an easy tool for wagering on volatility particularly during earnings season when stock moves are more pronounced.
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