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(Bloomberg) — There was a surprising winner from the market carnage that unfolded on Monday: A popular options strategy that bets on calm.

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The dispersion trade — which buys options in single stocks and sells contracts on an index — had its best day since 2020 as AI fears swept the market and sank some of the biggest US companies.

That’s because the strategy, which is beloved by all manner of hedge funds and banks, effectively amounts to a bet on an index remaining calmer than its individual stocks. Monday’s rout was so pronounced in tech and limited elsewhere that correlations between shares stayed low and index volatility remained contained — an ideal scenario for dispersion.

Once a niche play for hedge funds, dispersion has gone mainstream in recent years as banks packaged it into easy-to-access swaps for their clients. Versions of the strategy from JPMorgan Chase & Co., Citigroup Inc. and BNP Paribas SA all had their best day in nearly five years. The Cboe S&P 500 Dispersion Index gained the most since 2022.

“What looked like an indiscriminate ‘get out of equities’ scenario overnight has evolved into a market condition where correlations across stocks is even lower than it was last week,” Michael Purves, chief executive officer at Tallbacken Capital Advisors, wrote in a note. “This explains why the move in the VIX is tepid.”

Nvidia Corp. and Broadcom Inc. both dropped 17% on Monday while the S&P 500 fell only 1.5% and the Cboe Volatility Index, or VIX, ended the day just three points higher. That’s a stark contrast from the selloff spurred by hawkish Federal Reserve expectations in mid-December, or by the carry trade unwind in August. Dispersion trades lost money in both instances.

The trade sells options on a broad equity gauge like the S&P 500 while buying similar derivatives on its members like Apple Inc. or Nvidia. The idea is to ride the relatively higher demand for index hedges from investors seeking portfolio insurance, which means they typically pay more for protection at the benchmark level than it costs a trader at the stock level.

While dispersion comes in different flavors, Monday’s performance is likely to bolster the defensive credentials of the strategy, which have come under doubt in recent months on fears of crowding. The implied correlation across the S&P 500 has plummeted since Covid to near the lowest in Bloomberg data going back to 2011, meaning the entry point for the trade has become less attractive.

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