Strategy #0000000037 · Volatility and correlation trading
Volatility dispersion and implied correlation
Long constituent volatility against index volatility; correlation and volatility remain central risks.
Dispersion often expresses a view on constituent correlation by buying single-name volatility and selling index volatility. Index variance combines weighted constituent variances and pairwise covariance; all else equal, higher realised correlation raises index variance. Option P&L also depends on implied-versus-realised volatility, skew, jumps, weights, rebalancing and gamma path.
Index variance combines constituent variances with cross-constituent covariance.
Three ways in
Understand the story. Then inspect the risk.
Start with a familiar situation, check the payoff, then test how the numbers change.
The idea · in two minutes
How does constituent correlation affect the gap between single-name and index volatility?
Rose buys volatility exposure in two constituents and sells volatility exposure in an index containing them. Jack assumes that higher single-name than index volatility guarantees profit.
The index covariance term can rise with correlation and hurt the short-index leg. Equal variance is not the same as equal option price or P&L.
The scenario compares simplified constituent and correlation-based index variance. It has no option chain, gamma hedging or implied-vol repricing and is not an options backtest.
- Single-name variance legsVariance gap is an instructional measure, not option P&L or a return; excludes premium, gamma hedge and expiry.
- Index variance at low assumed correlationOnly a two-asset variance decomposition; real indices have many weighted constituents, and option P&L depends on path, skew and costs.
- Index variance at high assumed correlationIllustrative expiry outcome.
Illustrative research examples only. They are not live signals or a recommendation.
The mechanics · payoff and exposure
\sigma_I^2=\sum_i w_i^2\sigma_i^2+2\sum_{i<j}w_iw_j\rho_{ij}\sigma_i\sigma_j
σᵢ is constituent volatility, wᵢ index weight and ρᵢⱼ pairwise correlation. This is a variance decomposition, not a full dispersion P&L with option premia and dynamic hedging.
Greeks: the directional intuition
- 相關性
- Measures sensitivity to implied volatility.
- 跳空
- Measures sensitivity to implied volatility.
- 方差與波動
- Measures sensitivity to implied volatility.
\sigma_I^2=\sum_i w_i^2\sigma_i^2+2\sum_{i<j}w_iw_j\rho_{ij}\sigma_i\sigma_j
Practical context · published observations
Volatility dispersion and implied correlation: read the record with its caveats.
The chart uses the published figures or explicitly labelled study inputs below. A historical index or model replay is not the same as an investor’s realised account return.
只展示兩資產方差分解；真實指數有多成分權重，且選擇權的損益對路徑、偏斜和交易成本敏感。 Source ↗ · Methodology ↗
Change assumptions and inspect the scenario
Inputs illustrate the strategy mechanics; they are not live quotes, forecasts or investment advice.
Variants · same family, different risk levers
Related implementations change different assumptions.
Each row distinguishes the changed mechanism and its trade-off.
| Related strategy | Relationship | What changes | New cost or risk |
|---|---|---|---|
| Variance dispersion | Variance swaps | Compares single-name and index variance swaps. | Liquidity and contract terms may be limited. |
| Option dispersion | Dynamic gamma | Uses options with dynamic delta/gamma hedging. | Discrete hedging, skew and jumps leave risk. |
| Correlation swap | Direct correlation exposure | Pays on realised correlation versus a strike. | Contract, counterparty and valuation-model risk. |
Only a two-asset variance decomposition; real indices have many weighted constituents, and option P&L depends on path, skew and costs.
Read beyond the summary
References
Primary sources and research used to describe the strategy and its limits.