Article by: Lewis Biscamp and Tim Weithers
Published by: Chicago Trading Company, LLC
Date: ?
“Over the past several years, equity-index volatility products have emerged as an asset class in their own right. In particular, the use of variance swaps has skyrocketed in that time frame. A recent estimate from Risk magazine placed the daily volume in variance swaps on the major equity-indices to be US$5m vega (or dollar volatility risk per percentage point change in volatility). Furthermore, variance trading has roughly doubled every year for the past few years.
“Along with the proliferation of the breadth and complexity of available volatility products has come increased anxiety and confusion about how investors can most effectively and efficiently trade volatility. We offer a brief overview of the concept of variance and volatility; describe how a variance swap can be used to trade equity-index volatility; and illustrate some advantages that variance swaps offer over other volatility-based assets. Lastly, we will describe how CBOE variance futures contracts are essentially the same as an OTC variance swap.”
Full article (PDF): Link