Path Dispersion

Path dispersion refers to the degree to which different possible price paths of an asset spread apart over time. The greater the path dispersion, the higher the volatility, which leads to increased option premiums.

This concept is central to understanding why long-term options are more expensive ⎊ there is simply more room for the price to move, and thus more dispersion in potential outcomes. Traders use measures of dispersion to assess the risk of their positions and the potential for outlier events.

It is a core outcome of the stochastic processes used in financial modeling. Visualizing path dispersion helps in managing expectations for future volatility.