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  1. Arctic trader 25 december 2023 12:07
    Conversely, gamma-weighted dispersion necessitates a larger long single-stock leg compared to the index leg, enhancing gamma exposure but also increasing the theta paid. thetatitans.com/home/dispersion-trading/ This trade-off makes gamma-weighted dispersion less commonly used.

    Dispersion can be weighted according to theta, vega, and gamma. Each weighting has implications for the trade’s exposure to correlation. Theta-weighted dispersion, in particular, offers a nearly pure correlation exposure, with its profitability largely hinging on the difference between realized and implied correlations. thetatitans.com/home/dispersion-trading/ For investors, the timing of entry points in theta-weighted dispersion should consider the implied correlation of the index.

    Vega-weighted dispersion, combining elements of theta-weighted dispersion and a long single-stock volatility position thetatitans.com/home/dispersion-trading/, provides a hedged exposure to mispricing in correlation. This strategy’s effectiveness depends on the gap between average single-stock volatility and index volatility, and it’s generally seen as providing greater exposure to correlation mispricing.

    Gamma-weighted dispersion, while theoretically sound, is thetatitans.com/home/dispersion-trading/ rarely used in practice due to its demanding requirements and the typically higher implied volatility of single stocks compared to indexes.
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