Improved Dispersion Trading
Log in to collectAcademic paper
The Quest for Alpha in Equity Gamma
Rogerio Oliveira; Gustavo Wasserstein
- ?Constância Investimentos
- BRUniversidade de São Paulo
- BRHospital Universitário da Universidade de São Paulo
- ?University of São Paulo (USP)
Strategy in a nutshell
The strategy applies dispersion trading on the S&P 500 by dynamically combining straddles. It selectively goes long on cheap single-name options and shorts index options, exploiting volatility mispricing for profit.
Economic rationale
The approach relies on the frequent overpricing of index options relative to individual stock options. By targeting volatility differences between implied and realized levels, the strategy captures excess returns while remaining market neutral.
Backtest performance
Annualised return8.3%
Volatility10%
Sharpe ratio0.83