Dispersion Trading and the DSPX Index

As discussed in our previous blog post, dispersion trading is a correlation trade built with options: typically sell index vol, buy single-stock vol (short correlation), or the reverse (long correlation). Depending on sizing, it can be net long, net short, or roughly vega-neutral on total volatility while keeping most risk in the correlation bucket. The CBOE S&P 500 Dispersion Index (DSPX), launched in September 2023, now gives allocators a clean, forward-looking gauge of implied dispersion to time or size these trades.

CBOE launched DSPX to measure the next-30-day implied dispersion in the S&P 500 by combining index-option and single-stock option prices using a VIX-style methodology. In plain language, it’s a market-implied read on how much a basket of individual stocks (index constituents, weighted my their market cap) are expected to move relative to the index.

Media coverage has  framed this as "dispersion going mainstream” highlighting how hedge fund pods often sell index vol and buy single-name vol to monetize wide spreads — an especially live theme in an AI-polarized tape where single-stock swings can be big while the index looks calm. That “calm index / busy constituents” pattern has been visible at several points in 2024–25: broad indices stayed orderly while idiosyncratic moves around earnings/AI/tariffs were outsized—i.e., rising dispersion.

Dispersion Mechanics

Index variance decomposes into average single-name variance plus pairwise covariances (correlation). Dispersion trades exploit the wedge between index vol and the average of single-name vols — i.e., they trade correlation. CBOE has long disseminated Implied Correlation indices; DSPX focuses on implied dispersion directly.

Source: CBOE

Interestingly, a rising VIX (implied market volatility), leads often to higher (implied) stock correlations and thus implied dispersion. In the chart above, one can observe how the VIX and DSPX move relative to each other in relatively strong synchronicity.

The next illustrative chart shows how holding single-name vol constant, raising average pairwise correlation pushes index vol up — this is the core structural lever dispersion trades target.

Source: Resonanz Capital

The Dispersion Trade

The classic dispersion trade is to buy options on a basket of constituents (delta-hedged, sized to target a vega weight) and sell options on the index (SPX). The trade is often run vega-neutral so P&L is dominated by realized vs. implied correlation (plus selection, skew, and carry effects. If realized correlation prints below implied, the trade profits. If a macro shock drives correlations higher than implied, it loses.

Source: CBOE

The mirror image: a “long-correlation” (a.k.a. short dispersion) trade is when one buys index vol and sells single-name vol. This is used when you expect realized co-movement to spike (due to a macro shock, policy event clusters), or when single-name implieds look rich vs the index.

0-DTE activity concentrates in index options and can at times mute near-term index implieds relative to single-name options — one reason managers need to watch the surface when expressing correlation views. For micro-structure and governance around same-day options, see our 0-DTE post.

The Correlation Risk Premium (CRP)

The academic and practitioner literature documents a correlation risk premium (CRP): implied correlation tends to exceed subsequent realized correlation on average —meaning short-correlation carries positive expected carry but is exposed to left-tail spikes when macro shocks make everything move together.

In a study of data from 1996-2003, Driessen, Maenhout & Vilkov find a CRP of 18 pts, as displayed in the chart below:

Source: Driessen, Maenhout & Vilkov; Resonanz Capital

In a 2021 study, Faria, Kosowski & Wang document a CRP of 6.7 to 8.9 pts (for 91-day options), shown below:

Source: Faria, Kosowski & Wang; Resonanz Capital

They also confirm their U.S. results with a shorter tenor of 30 days, as observable in the next chart:

Source: Faria, Kosowski & Wang; Resonanz Capital

How to use DSPX to track dispersion hedge-fund managers?

One can explain a large share of many dispersion managers’ P&L with three ingredients:

• Implied dispersion marks: changes in DSPX (ΔDSPX).

• Dispersion carry: the gap between implied volatility and what later prints (realized volatility), approximated by (DSPXₜ − next-month realized cross-sectional S&P 500 dispersion). 

• Index vs single-name vol mix: changes in VIX (index implied vol) and VIXEQ (single-name implied vol) to capture vega tilts and skew effects.

Thus, the following model can be proposed:

Manager return ≈ α + β₁·ΔDSPX + β₂·(DSPXₜ − RealizedDispₜ₊₁) + β₃·ΔVIX + β₄·ΔVIXEQ + ε

The DSPX can also be used as an opportunity and timing gauge.

An elevated DSPX may mean that the market is pricing more idiosyncratic action (larger wedge between single-names and index). That typically widens the hunting ground for short-correlation (long dispersion) books.

For a timing indicator, the following can be used: Increase risk when DSPX is high and implied correlation (COR1M/COR3M - also provided by CBOE) is low, indicating a classic “calm index / lively constituents” regime. DSPX also tends to spike during earnings season.

Conclusion

Dispersion is ultimately a correlation trade, not a one-way bet on volatility. The arrival of DSPX gives allocators a forward-looking, investable signal for how much idiosyncratic movement the market is pricing relative to the index. Pairing DSPX with implied correlation (COR1M/COR3M) and a simple implied–realized dispersion lens lets your allocator job in selecting managers, sizing risk, and monitoring exposures.

With DSPX and the correlation indices, allocators can move dispersion from “black box” to a rule-based sleeve — harvesting CRP when it’s on offer, dialing risk with clear triggers, and holding managers accountable with a compact set of pre-agreed diagnostics rather than post-hoc narratives.