Last week, I highlighted a history-making bout of dispersion across large-cap US equities.

Between an early-year, under-the-hood rotation, the impact of the AI disruption theme and traditional earnings season “divergence-of-fortune” dynamics, the difference between the absolute value of the one-month change in the average S&P 500 index constituent versus the change in the index itself, recorded one of its most extreme readings on record.

More specifically, the average big-cap US stock moved nearly 11% over a rolling one-month window through mid-February, a period during which the S&P 500 was flat. That spread — 11%-0% = 11% — was among the largest on record. Looking back a quarter century, the only comparable episodes occurred around Lehman’s collapse and the dot-com boom/bust.

That was great news for the short correlation / long dispersion crowd. If you were in the business of funding index vol shorts with longs in single-name vol, you enjoyed an “optimal performance environment,” as Nomura’s Charlie McElligott put it, in his latest.

The figure above shows you single-name realized vol versus index vol. It’s 100%ile on a long lookback.

Now, McElligott said, there’s some risk of profit-taking in that trade. Any “pure” (if you will) risk-off catalyst that pushes up correlation would obviously incentivize such an inclination.

“As the list of equities discomforts grows, we’re seeing occasional hints of outright cross-asset, risk-off-type moves,” Charlie wrote. “Both single-name vols and correlations are in a spot now where tactical ‘long dispersion’ trades would look to move their feet to exploit the RV and capture some PNL.”

The figure above gives you a sense of the PNL for the long dispersion trade.

What would profit-taking mean in this context? Well, if the trade is — stylized — long single-name vols versus short index vol, profit-taking’s the opposite.

“This ‘cash-in’ generically means that the ‘long’ in single-name vol would be sold, while the offsetting position to make the trade vega neutral from the ‘short’ index vol leg is bought / covered,” McElligott went on. That, he said, “then risks [a squeeze] in index vol, as the legacy positioning in the trade remains substantial.”