Tremors from AI euphoria and oil price moves are boosting a popular dispersion trade among hedge fund managers. Wild gyrations in individual stocks, driven by advances like Meta Platforms Inc.’ new Muse AI agent and geopolitical drama in Iran and Ukraine, have sent shares swinging in opposite directions. Meanwhile, Treasury yields at two-decade highs are driving up borrowing costs.

This divergence sets up an ideal situation for the dispersion trade, where stocks within the S&P 500 heading in different directions dampen overall index swings. Single-stock implied volatility has contracted since late July, especially for high-flying technology names, making the trade more attractive to enter. The spread between single-stock volatility and the S&P 500 is widening as traders buy individual stock options while selling index contracts.

While dispersion strategies are often seen as crowded, investors can find opportunities in tech and energy sectors between refiners and oil producers. Software and AI firms have been seesawing as the disruption narrative shifts. For a volatile market, simpler hedging playbooks using exchange-traded options can be effective.

Investors are best off picking a handful of stocks to back while hedging downside using puts on ETFs like the State Street SPDR S&P 500 ET F Trust and the Invesco QQQ Trust. Despite the opportunity, some warn the trade is due for a washout after being in vogue for four to five years.