May 16th, 2005, 5:50 am
You can certainly set up dispersion trades to approximate a position in correlation - that trade is as old as the hills! The thing is, you can set the trade up multiple (slightly) different ways: gamma neutral, vega neutral, theta neutral, "vol beta" neutral, etc. From memory (i.e., treat as suspect info!), the theta neutral one may give you the best proxy for correlation. You can backtest option or var swap portfolios to check this out.