How Does a “Variance Swap” Allow Traders to Bet Directly on Future Realized Volatility?
A variance swap is a forward contract where one party agrees to exchange a fixed rate (the strike price) for the actual, or realized, variance of the underlying asset over a specified period. It allows traders to directly speculate or hedge against the future level of realized volatility without the complexity of managing a portfolio of options.
The payoff is linear to the variance, making it a pure play on volatility.
Glossar
Variance Swap
Instrument ⎊ A variance swap is a financial instrument designed to provide pure exposure to the realized variance of an underlying asset.
Variance
Dispersion ⎊ In cryptocurrency, options, and financial derivatives, variance quantifies the degree to which returns deviate from their expected value, representing the inherent uncertainty within an asset’s price movements.