Popular Hedge Fund Options Strategy Attracts Contrarian Bets

The dispersion trade has become one of the most popular strategies among Wall Street hedge funds. Now, some investors are taking the other side of the wager.

The US equity market has been deceptively calm since the start of August, with 60-day realized volatility the lowest since before the pandemic. The go-to measure of market gyrations, the Cboe Volatility Index, has been stuck below its long-term average of 20 since mid-June. But beneath the surface, individual stock prices are churning violently — Oracle Corp.’s 32% surge over the past month is just one example.

That dynamic has drawn hedge funds ...