‘Crowded’ Dispersion Trade Rattled by Spiraling Iran Worries

The escalating conflict in the Middle East has jolted a popular hedge fund strategy, threatening a spillover into broader markets if volatility persists.

The dispersion trade — which uses options to exploit the difference between the volatility of a broader index and that of its individual components — has been a favorite with investors. The bet pays off as long as the S&P 500 Index continues edging higher while stocks keep churning beneath the surface, a market dynamic that has persisted for months.