Cboe Global Markets (BATS:CBOE) will work with S&P Dow Jones Indices, part of S&P Global (NYSE:SPG), to develop the Cboe S&P 500 Dispersion Index, a gauge that’s meant to help investors better understand portfolio diversification benefits and implement dispersion trading strategies, the company said Wednesday.
The index is the first concept developed by Cboe Labs, the company’s new innovation arm focused on new tradable products and services.
In assessing a portfolio of investments, dispersion is a measure of the spread of constituent returns over a defined period, such as a month. “In practice, dispersion measures both the opportunity set for individual security selection within a portfolio, as well as the potential diversification achieved by their combination,” Cboe (CBOE) said.
Like the Cboe Volatility Index represents implied volatility of the S&P 500, the Cboe S&P 500 Dispersion Index is intended to represent the implied dispersion among S&P 500 constituents over a one-month period, based on the prices of single stock and index options.
“Dispersion is recognized as one of the fundamental metrics of market risks,” said Tim Edwards, global head of Index Investment Strategy at S&P Dow Jones Indices (SPGI). “Unlike related measures of volatility, there hasn’t yet been a simple, tradeable, and standardized index that enables market participants to hedge and express their views on dispersion in the U.S. equity markets.”
Cboe (CBOE) also announced the creation of Cboe Labs, a new division that will develop new ideas into products and services. The company plans to develop a futures product based on the dispersion index, it said.
In September, Goldman Sachs upgraded Cboe (CBOE) to Neutral from Sell on expectations that its SPX options will drive significant growth.
Photo by Dimitry Anikin on Unsplash