BNP Paribas QIS Lab has just released its latest white paper on equity dispersion trading, “Equity Dispersion: how, what and when to trade”, building on the findings of the earlier “Equity Dispersion – a bird’s‑eye view”.
Following on “Equity Dispersion – a bird’s‑eye view”. The new research “Equity Dispersion: how, what and when to trade” offers a practical roadmap for investors who want to capture the dispersion premium in the U.S. equity market, explaining the mechanics, the tools and the timing behind three distinct dispersion‑trading approaches.
Key takeaways
This report examines how, what, and when to trade to capture dispersion in the U.S. stock market.
- The report proposes a novel methodology for decomposing the returns of quadratic dispersion strategies in a conceptual framework.
- These theoretical decompositions help understand the returns of gamma-flat, vega-flat and theta-flat strategies.
- Moving beyond theoretical concepts, the report shows what instruments to trade in order to capture dispersion and how to mitigate risk and enhance returns.
- An examination of the drivers behind the dispersion premium supports a strategic allocation to dispersion strategies.
- Adjusting to market and business cycles can be achieved by strategically switching among the three risk approaches.
Why equity dispersion matters again
Dispersion – the variation in returns across individual stocks – has emerged as a reliable leading indicator of market dynamics. When dispersion widens, it often signals heightened uncertainty and the potential for higher future returns. Conversely, a tight dispersion environment can hint at a more complacent market. The QIS Lab’s latest work shows that, beyond its informational value, dispersion can be turned into a tradable strategy that adds a defensive layer to portfolios and, in the right market conditions, can generate attractive risk‑adjusted returns.
3 risk-profiles, 3 tools
The paper breaks dispersion trading down into three “risk‑flat” strategies.
| Strategy | What it captures | Typical market condition | Core risk exposure |
| Gamma‑flat | Pure statistical dispersion of stock returns | Recessions or sideways markets | Idiosyncratic variance, low correlation |
| Vega‑flat | Similar to gamma-flat, with higher exposure to the index vol premium | Calm, low‑volatility periods | Volatility risk, correlation premium |
| Theta‑flat | Carry from the correlation premium | Bull markets, rising equity trends | Positive carry, higher gamma exposure |
The authors explain that each approach can be viewed as a combination of three “building blocks”: single‑share variance, pair‑wise correlation, and volatility dispersion. By measuring exposure to each block, investors can aim to forecast short‑term mark‑to‑market performance and assess long‑term payoff potential.
From theory to the trading floor
The white paper digs even deeper. It walks readers through the practical steps needed to implement dispersion strategies with liquid, plain‑vanilla options:
The white paper digs even deeper. It walks readers through the practical steps needed to implement dispersion strategies with liquid, plain‑vanilla options:
- Instrument selection – ATM options or a strip of strikes are used to capture the required variance exposure while limiting path‑dependency.
- Basket construction – A systematic weighting scheme is proposed to build a “dispersion basket” that remains gamma‑flat (or vega‑flat, theta‑flat) throughout the trade life.
- Risk mitigation – Intraday hedging techniques, dynamic rebalancing and the use of variance‑swap proxies are described to keep the strategy within its intended risk envelope.
- Tactical allocation – The paper shows how to switch between three risk profiles as market cycles evolve, allowing the same capital base to serve both defensive and alpha‑generating roles.
What drives the dispersion premium?
- The authors also revisit why gamma‑flat dispersion has historically been “cheap”: Correlation premium – When stocks move less in sync than the market expects, the dispersion basket earns a payoff.
- Behavioural anomaly in single‑share options – Systematic mis‑pricing of individual option volatilities creates an additional edge for dispersion traders.
A low carry cost combined with a long volatility exposure makes it an appealing defensive overlay for multi‑asset trend systems.
A practical toolbox for investors
The QIS Lab’s research is deliberately built for real‑world deployment:
- Quant Corners – Concise equations that translate the conceptual framework into spreadsheet‑ready formulas.
- Review Corners – Summaries of the most relevant academic studies, offering a quick reference for due‑diligence.
- Technical Addendum – Full mathematical derivations for those who want to dig deeper, while the main text remains accessible to a wider audience.
Why is this research paper relevant?
“Equity Dispersion: how, what, when to trade?” equips investors with a clear, systematic way to harness dispersion as a source of alpha and a shield against market stress. Whether they are looking to add a defensive overlay, generate carry in a bull market, or simply diversify their alternative‑risk toolkit, the paper provides the evidence, the methodology and the timing cues needed.
For more information, to request the full paper, or to discuss how dispersion strategies could fit your portfolio, please get in touch with Julien Turc or Raphael Dando.
