A mode of trading that involves taking a long position in the volatility of a basket or index of underlying securities according to their weight in the basket/ index, while taking a short position in the volatility of the whole basket or index. In other words, a trader carries out dispersion trading (long dispersion)- also, inverse dispersion strategy– buying the volatility of underlying components and selling the volatility of the basket/ index. In options trading, dispersion strategy involves the determination of risk premium for bearing correlation risk in the options market.

The dispersion strategy is an attempt to capitalize on the average index correlation/ average basket correlation (dispersion). A dispersion trade is entered into when a trader has views that the components of an index/ basket will be more volatile than the index/ basket itself.

Short dispersion (also known as direct dispersion strategy) involves going short basket/ index volatility and long volatility of its components