Dispersion trade: short correlation, long volatility
Dispersion trades are a way of betting on an end to the historically high market correlation that began during 2008, when shares of companies in various industries all rose and fell together, frustrating money managers who earned their keep by researching and picking individual companies.
In a dispersion trade, managers sell put and call options on an index such as the S&P 100 during market declines, when demand is heavy among investors who want to protect themselves from losses. They use the rich premiums received for the index options to buy put and call options on some or all of the stocks comprising the index.
SocGen has one take on this idea called Symphony - which is short correlation, long vega. Och Ziff seems to have bitten hard on this idea. It seems to add up as improvements in liquidity make the premise of the trade more compelling.