Variance and Volatility Swap Trading Ideas and Risks
Summary
The discussion points readers seeking variance and volatility swap strategies toward sell-side research and foundational papers. It frames relative-value trading as comparing implied variance across markets using historical relationships: buy the market that appears cheap and sell the one that appears expensive, while recognizing that timing can dominate the outcome. It also identifies dispersion as difficult to price well and characterizes rolling short variance exposure as a carry trade.
The answers emphasize learning product mechanics before trading because losses can grow rapidly during volatility shocks. One example describes a short S&P 500 variance swap entered before the March 2020 volatility surge, with losses escalating over the following weeks. That illustration conveys tail risk rather than establishing a general expected outcome. The exchange offers pointers and broad cautions, not a full strategy specification, pricing framework, or evidence that historical relative-value relationships will persist.
Key ideas
- Variance and volatility swap research may be found in sell-side publications and foundational papers.
- Relative-value trades compare variance across markets using historical relationships, but their success depends heavily on timing.
- Dispersion trades can be difficult to price accurately.
- Rolling short variance is a carry exposure that can incur severe losses during volatility spikes.
- Historical relationships do not ensure future trading success.
Tags
Full text
# looking for recommendation for a var/vol swap trading book # looking for recommendation for a var/vol swap trading book I am aware this book - volatility trading by Euan Sinclair, and it's nice book. But I am looking for book focus on var/vol swap trading, i.e., introduce about trading strategy/ideas by using var/vol swap, i.e, relative value, dispersion, rolling short variance... Just want to understand this new area so any basic introduction would work. If you know some paper to recommend, please also share. Thanks a lot! ## Answer by user42108 (score 3) https://quant.stackexchange.com/a/63616 You'll probably have more luck finding var swap and vol swap strategies from sellside pieces than in a book. From what I've read, I don't think RV trading via var or vol swaps is much different than using vanilla options. Buy the cheap var, sell the expensive var (all based on historical relationships), hope you get lucky on the timing (c.f. SX5E vs. SPX in early 2018 or Asia vs. SPX in early 2020). ## Answer by AKdemy (score 2) https://quant.stackexchange.com/a/63632 Before getting into trading - get to know the basics. These are risky products. Towards a Theory of Volatility Trading by Peter Carr et al. is probably the most important paper. There are two documents from JP Morgan that I reference here and a short discussion about replication. With regards to dispersion trades, I argue you will find it very hard to find a pricing tool that will offer you a way to price these (properly). Rolling short variance - that is a carry trade. There is a saying for carry trades: “Up by the stairs and down by the elevator”. Now this is traditionally for FX. For vol and variance, you could probably say down the cliff. To illustrate, assume you entered short S&P500 VS for 6months on March 4th 2020 with 100k vega notional (in terms of var ~2k). Fair Vol was just below 25% (replication, not actual market quote). Your accrued loss on March 18th would have breached 2 million. One month later, -3 mil.
Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.