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Variance Swap Basis as the Gap Between Strip Value and Market Strikes

Article Quant Q&A · Author: miguel
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Summary

The document asks what traders mean by the variance swap basis and whether it compares expected future realized volatility with implied volatility from a surface at a chosen tenor. The accepted answer gives a narrower practical interpretation: it is the difference between the theoretical value of a variance strip and the strikes actually quoted in the broker market.

A second response cautions that the expression is not presented as a widely standardized industry term and begins to outline possible meanings, but the excerpt ends before those possibilities are explained. The material therefore offers a useful market-oriented definition while leaving terminology and calculation details unresolved. It does not specify how to construct the theoretical strip value, which broker quotes or conventions to use, or how tenor and volatility expectations enter the calculation. Readers should confirm the intended definition in the relevant trading context before comparing reported basis figures.

Key ideas

  • The accepted response defines variance swap basis as the gap between theoretical variance strip value and broker market strikes.
  • The question's proposed comparison with forecast realized volatility and surface implied volatility is not directly confirmed.
  • The excerpt says the term may not have a common industry meaning.
  • It gives no calculation procedure, conventions, or evidence beyond the brief responses.

Tags

VolatilityDerivatives pricingOptions
Full text
# Varswap Basis - What is it in practice?


# Varswap Basis - What is it in practice?












What is the varswap basis? I am not completely sure what this number represents. Is it the basis between the estimated future realized volatility and the vol surface implied volatilty at a specified tenor?

## Answer by Strange (score 3, accepted)

https://quant.stackexchange.com/a/4128

Variance swap basis is the basis between theoretical value of the variance strip and the actual strikes traded in the brokers' market.

## Answer by Brian B (score 2)

https://quant.stackexchange.com/a/687

Whatever it is, it clearly is not a common term of art in the industry. Three possibilities come to mind:

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.