Using Dispersion: A High Concept at a Low Cost

Active traders are facing a bit of a dilemma right now: The recent run-up makes people reluctant to buy or chase stocks at new 52-week highs. But it's also a tough place to be short. Neither side engenders what I call two-handed confidence.

That's why option traders like to take advantage of their ability to swing both ways. We can be long and short simultaneously by using a dispersion trade.

Volatility dispersion trading is a popular hedged strategy designed to take advantage of relative value differences in volatilities between an index and a basket of the component stocks.

Sum of the Parts

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