A variance swap is an over-the-counter (OTC) derivative contract where two parties exchange a fixed payment, the variance strike, for a payment based on the realized variance of an underlying asset over a specific period. In crypto, these instruments allow participants to directly trade the future realized volatility of a digital asset.
Mechanism
The payoff of a variance swap is calculated as the difference between the realized variance of the underlying crypto asset’s price, often derived from squared daily returns, over the contract term and a pre-agreed variance strike, multiplied by a notional amount. One party pays the fixed strike, and the other pays the realized variance. This mechanism provides pure exposure to volatility, isolated from directional price movements.
Methodology
Institutional traders and quantitative funds utilize variance swaps as a sophisticated methodology for expressing views on crypto market volatility, hedging volatility exposure from other derivatives, or for arbitrage strategies. They offer a direct and linear payout on volatility, providing a more efficient way to manage risk associated with price fluctuations than options. This allows for precise calibration of portfolio risk and speculative bets on future market turbulence without taking a directional stance on the underlying asset’s price.
We use cookies to personalize content and marketing, and to analyze our traffic. This helps us maintain the quality of our free resources. manage your preferences below.
Detailed Cookie Preferences
This helps support our free resources through personalized marketing efforts and promotions.
Analytics cookies help us understand how visitors interact with our website, improving user experience and website performance.
Personalization cookies enable us to customize the content and features of our site based on your interactions, offering a more tailored experience.
