Volatility Arbitrage Dispersion Trading Strategy by viprasol
By viprasol
Performance Metrics
- Author: viprasol
- Symbol: CRYPTO:BTCUSD
- Timeframe: 4 hours
Description
OVERVIEWVolatility Arbitrage Dispersion Trading Strategy Quantitative Finance is a professional, rules-based relative-value system by Viprasol Tech Private Limited. It brings the core ideas of institutional volatility arbitrage and dispersion trading to TradingView using quantitative finance methods: basket volatility decomposition, implied correlation, regime filtering and an Ornstein-Uhlenbeck mean-reversion model.In classic dispersion trading, desks compare index volatility with the volatility of its components and trade the gap between implied and realized correlation. This volatility arbitrage dispersion trading strategy measures the same structure from price data and trades the chart asset when it becomes statistically mispriced against its basket.█ HOW IT WORKS⚪ 1. Dispersion Engine▸ Builds a weighted basket (index) from up to 5 components▸ Measures index volatility, average component volatility and dispersion (the gap between them)▸ Calculates implied correlation from the index variance decomposition: ρ = (σ_index² − Σw²σᵢ²) / ((Σwσᵢ)² − Σw²σᵢ²)▸ Automatically removes the chart asset from the basket so it is never compared with itself⚪ 2. Regime Filter (volatility arbitrage risk control)Dispersion trading is known to suffer in crises, when correlations spike. The strategy only trades when:▸ Implied correlation is above the minimum (the basket moves as one)▸ Correlation is NOT spiking (correlation z-score below the block level)▸ The asset's volatility is not expanding sharply (short RV / long RV)▸ Optional: implied volatility is above realized volatility (positive volatility risk premium, e.g. Deribit DVOL for BTC)⚪ 3. Residual Model (quantitative finance core)▸ Hedges the chart asset against the basket with a rolling beta▸ Models the cumulative residual as an Ornstein-Uhlenbeck (AR-1) process▸ Estimates the mean-reversion half-life and the equilibrium (fair value)▸ Produces an s-score: how many standard deviations the asset is from fair value▸ Trades only when the half-life shows real, fast mean reversion█ ENTRIES & EXITS▸ Signal: s-score crosses back inside the entry band (reversal hook), only in a tradeable regime▸ Reverse Mode (default ON): BUY ↔ SELL are flipped▸ Take Profit: Fair Value (price where the residual returns to equilibrium) or Risk:Reward▸ Stop Loss: ATR-based▸ Statistical exits: fair value reached, s-score stop, time stop (multiple of half-life)▸ Cooldown after each exit to avoid overtrading█ POSITION SIZINGVolatility targeting (default 25% annual volatility, capped by max leverage) or fixed % of equity — standard practice in quantitative finance.█ VISUALS▸ Profit / loss position boxes on price with TP and SL levels▸ BUY / SELL markers▸ s-score pane with cheap / rich zones, or a Correlation & Dispersion view▸ Pro dashboard: regime status (TRADEABLE / STAND ASIDE / MODEL INVALID), dispersion metrics, implied correlation, half-life, fair value and live performance█ RECOMMENDED USE▸ Timeframe: 4H or 1D (lower timeframes are dominated by fees and noise)▸ Best on liquid assets that belong to a clear basket (e.g. major crypto vs the crypto basket)▸ Adjust commission and slippage in Properties to match your broker█ DEFAULT BACKTEST PROPERTIESInitial capital 10,000 · Volatility-target sizing · Commission 0.05% · Slippage 2 ticks · Orders on bar close.█ DISCLAIMERThis volatility arbitrage dispersion trading strategy is for educational and research purposes in quantitative finance only and is not financial advice. It estimates correlation from realized price data and does not trade options. Past performance does not guarantee future results.© Viprasol Tech Private Limited