Hedge Funds' Secret Weapon Goes Mainstream With CBOE's DSPX Debut

Dispersion trading, a strategy beloved by hedge funds for profiting from stock dislocations, is stepping into the spotlight with the launch of the CBOE S&P 500 Dispersion Index (DSPX).

Designed to capture price differences between options on the S&P 500 and its underlying constituents, this innovative index is set to redefine how investors approach market volatility.

Cboe’s Ambitious Plans

CBOE Global Markets Inc. CBOE is not stopping at the index’s launch; they are already eyeing the introduction of futures products tied to DSPX by the second quarter of the next year, Bloomberg reported Wednesday.

This move reflects the growing popularity of dispersion trading, which proved its resilience in the face of market turbulence in 2022.

Read also: Morgan Stanley Strategist Advocates Defensive Stance As Market Dynamics Shift

What’s Dispersion Trading?

Dispersion trading involves betting on how benchmark indices will fluctuate relative to the volatility of individual stocks within those indices. It’s a strategy often employed by volatility hedge funds and banks, offering a sophisticated approach to navigating market dynamics.

In simple words, dispersion trading is a wager on how much the key benchmark index, such as the S&P 500, will move compared to the ups and downs of the stocks that make up the index.

What Do Analysts Think?

Peng Cheng, analyst at JPMorgan Chase & Co., highlighted the growing popularity of this trading strategy, telling Bloomberg that it has “increased significantly lately.”

John Hiatt, vice president at Cboe Labs, compares the DSPX to the firm’s flagship CBOE Volatility Index (VIX), also known as the fear index, indicating its potential to achieve substantial trading volumes, acording to Bloomberg.

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This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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