Variance Swap Volatility and Option Strategies
Marco Avellaneda
A variance swap is an OTC contract
in which counterparties exchange the (future) realized variance
of an asset against a fixed nominal variance. The fair value
of the nominal variance, or Variance Swap Volatility (VSV), is a useful quantity
that predicts the unconditional variance of assets returns over
the period of interest. I suggest that the VSV can be a useful
statistic for managing option positions.