Dirty (sic) Dispersion!

It seems like this strategy piques your interest so here's another one. Not so frank though;

 

in the first paper that was posted this is my favorite part..

"Free lunch? Not quite… what about a day like this?"

 

and this part to..
"So, if you have the likes of Allianz and AIG asking you for
markets in single stock options and they happen to be for
about five times the average volume in those things, you
can either tell them to get lost or you can take down the
paper for a bit of edge and do the (more liquid) index side
against it, effectively establishing the beginning of a
dispersion position. (either long or short). Now you sold 1
million MSFT vega, but you have bought some amount of
NDX vega to temporarily stabilize your position. If you
can get some other constituents on, you got a nice little
dispersion trade going. You can now ease out of this over
time, minimizing market impact or show the stock part to
your friends and pretend you’re the biggest swinging dick
on the Street.
Usually this type of trading is less considerate of getting a
representative basket going, but works with more
traditional hedge parameter computation, such as volatility
surface betas. Nevertheless, it is a form of dispersion. We
will come back to this point in a minute.""

 

just so you don't get confused.. this is on
http://www.elitetrader.com/vb/attachment.php?s=&postid=3585076
this paper.. i haven't read the second paper yet.

 

• Demand for index protection: Institutionals will
usually buy protection through index vol, hence keeping the index surface higher relative to the
average basket vol surface.
• Supply for single stocks volatility: On individual equities, there are proportionally more
premium sellers than there are on the index side.

• Event risk: As always, people like
underestimating the extremes and fun days such
as bankruptcies, corporate scandals and
mergers/take-overs are pay dirt for long
dispersion.

thats kinda scary to think that for single stocks there is a plenty of vol sellers..... long disperion.. tail event of one securitie in basket.. doesn't effect vol of index much at all..

 

This is all basic stuff. To say there are more sellers of vol in street than index is somewhat misleading. There are thousands of single names that have listed vol and only a handful of indices. Most of those single names are not party to an index.

 

just a thought here.. say you have a very small account.. would the premise of all this on a smaller scale be applicable in a slightly different way.. say for example.. You condor an index.. with a kind of queen of condors strategy.. meaning you roll up to three times.. with wide striked condors..
then you go with in the index suck out the stocks that on the highest average blow out their implieds with their historical realized vols.. .. so essentially your long vol in the constituents with like ratios and short vol in the index with condors.. just brainstorming here

 

this is common knowledge for you Atty.. not for Carey the noob..

 

what do you mean not "party" to the index

 

well, yet I have yet to hear of anyone blow up being short dispersion and the street is littered with people who have gotten their asses ripped when index vol ran through the roof...