Since the introduction of derivatives into the modern financial market, volatility based tradingstrategies have emerged as important tools for asset managers. Since the financial crisis apopular trading strategy has been dispersion trading, however few published studies ofdispersion trading exist. This thesis aim to perform a study of how dispersion strategies performand their characteristics. This is achieved by finding basic common dispersion trading strategies,isolate and evaluate their attributes to then draw conclusions in general about dispersion trading.Three basic dispersion strategies are found based on vanilla option spreads and their performanceis back-tested. It was found that the strategies delivered positive return with low marketcorrelation and acceptable risk. It is also found that transaction costs is a key-factors tosuccessfully use dispersion trading. Thus it is a vital factor to consider when creating adispersion based trading strategy. An interesting topic for further research is how trading signalssuch as the implied correlation and the implied volatility spread can be used to increaseprofitability. As well to model market impact from dispersion trading.

Since the introduction of derivatives to the financial markets, volatility trading has emerged as a method for investors to make money in every market condition. In parallel with introducing derivatives to the financial markets, hedging methods have emerged and are today essential instruments for the liquidity providers active in the markets. The most commonly used hedging method is delta hedging which cancels out the directional risk in the option. Hedging the vega risk with dispersion trading seems to be both a profitable and accurate hedging method. This thesis examines the effectiveness of dispersion trading for reducing the vega risk in OMXS30 options. This is investigated by backtesting a strategy based on going short OMXS30 index volatility and long volatility on a tracking portfolio with a zero net vega. This investigation aims to determine if the dispersion trading strategy can be a reliable risk management tool. It was found that vega could accurately be hedged using dispersion trading. However, when considering the bid-ask spread, the strategy did not show profitability over the simulated period. Weighting the portfolio more in favour of companies with smaller bid-ask spreads did not show improved profitability. / Sedan introduktionen av derivat på de finansiella marknaderna har volatilitetshandel dykt upp som en metod för investerare att tjäna pengar i alla marknadsförhållanden. Parallellt med introduktionen av derivat på de finansiella marknaderna har säkringsmetoder vuxit fram och är idag väsentliga instrument för de likviditetsgivare som är verksamma på marknaderna. Den vanligaste säkringsmetoden är delta säkring som tar bort den riktade risken i optionen. Att säkra vegarisken med spridningshandel tycks vara både en lönsam och pålitlig säkringsmetod. Detta examensarbete syftar till att undersöka effektiviteten av att använda en spridningshandel för att minska vegarisken i OMXS30-optioner. Metoden involverar att simulera en strategi baserad på att vara kort volatilitet i OMXS30 och lång volatilitet på en spårningsportfölj på historisk data. Genom denna undersökning strävas det efter att avgöra om strategin för spridningshandel kan vara ett tillförlitligt verktyg för riskhantering. Det visade sig att vega kunde säkras med hjälp av spridningshandel. Strategin visade sig vara lönsam under den simulerade perioden men när köp- och sälj-spreadarna i de enskilda aktieoptioner inkluderades var det inte längre lönsamt att utföra metoden. Att vikta portföljen mer till förmån för företag med mindre köp- och sälj-spread visade inte på förbättrad lönsamhet.