Strategies · Library · Volatility
§7.6Volatility
Volatility trading with variance swaps
A variance swap pays on the difference between realised and agreed variance, so no continual delta hedging is needed. Long profits from higher realised volatility. Can also be used for a dispersion trade.
- Asset class
- Volatility
- Held for
- To expiry
- Data
- ARCANE has part of the data
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Realised variance of daily log returns against a preset strike.
- Entry and exit
- Enter the swap and hold to maturity.
- Sizing
- Set by variance notional.
How it fails
- Convex losses in short positions
- Dealer-only market
- Counterparty risk
Data it needs
- variance swap quotes
- daily prices
Daily closes give realised variance; swap strikes are not available.
How ARCANE uses it
Realised-volatility figures could back a Call, no swaps drafted.
Needs derivatives.
Filed under the volatility card
Hold less after a month of high volatility and more after a calm one. The paper found this raised return per unit of risk, because volatile spells are not paid for with higher returns.
A paper plan from this card holds 5 to 63 days, stops at 2.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §7.6, p. 85 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.