The simplest such instruments are variance and volatility swaps. A volatility swap is a forward contract on future realized price volatility. Similarly, a variance swap is a forward contract on future realized price variance, variance being the square of volatility. In both cases, at inception of the trade, the strike is usually chosen such that the fair value of the swap is zero. This strike is then referred to as fair volatility or fair variance, respectively.
http://www.fincad.com/resources/resource-library/wiki/variance-and-volatility-swaps
OPTIONS TRADING GIVES VOLATILITY EXPOSURE. If the volatility of an underlying is zero, then the price will not move and an option’s payout. is equal to the intrinsic value. Intrinsic value is the greater of zero and the ‘spot – strike price’. for a call and is the greater of zero and ‘strike price spot’ for a put.
https://cfe.cboe.com/education/tradingvolatility.pdf
The effects of the volatility smile, for instance, are accounted for by construction. 1  Of course, the prices of variance and volatility swaps can also be calculated within a model of asset price dynamics, and FINCAD also provides the functionality to price such swaps using the Heston model of stochastic volatility.
http://docs.fincad.com/support/developerfunc/mathref/varianceswaps.htm
In the last section we discuss the connection with volatility swaps. A variance swap is a forward contract on annualized variance, the square of the realized volatility. v
http://www.ivolatility.com/doc/VarianceSwaps.pdf
Both swaps provide pure exposure to volatility alone, unlike vanilla options in which the volatility exposure depends on the price of the underlying asset. These swaps can thus be used to speculate on future realized volatility, to trade the spread between realized and implied volatility, or to hedge the volatility exposure of other positions.
http://www.fincad.com/resources/resource-library/wiki/variance-and-volatility-swaps
Variance swaps are theoretically simpler than volatility swaps; they can be hedged with a static position in European call and put options (with suitably chosen strikes), together with a dynamic position in the underlying asset. Volatility swaps, on the other hand can only be hedged with a dynamic portfolio of European options. But the fact that the instruments may be hedged implies that they may be valued in a model-independent manner.
http://www.fincad.com/resources/resource-library/wiki/variance-and-volatility-swaps
Variance swaps Introduction The goal of this paper is to make a reader more familiar with pricing and hedging variance swaps and to propose some practical recommendations for quoting variance swaps (see section Conclusions). We give basic ideas of variance swap pricing and hedging (for detailed discussion see [1]) and apply this analyze to real market data. In the last section we discuss the connection with volatility swaps. A variance swap is a forward contract on annualized variance, the square of the realized volatility. V R =σ R 2 =252 1 cccccccccccc n−2 „ i=1 n−1 i k
http://www.ivolatility.com/doc/VarianceSwaps.pdf
recommendations for quoting variance swaps (see section Conclusions). We give basic ideas of variance swap pricing and hedging (for detailed discussion see [1]) and apply this analyze to real. market data. In the last section we discuss the connection with volatility swaps. A variance swap is a forward contract on annualized variance, the square of the realized volatility. i valuation date. n - number of business days from the Trade Date up to and including the Maturity Date.
http://www.ivolatility.com/doc/VarianceSwaps.pdf
Introduction. 1  Rather than gaining exposure to the market's volatility through standard call and put options, investors can take views on the future realized volatility directly by trading derivatives on variance and volatility. The simplest such instruments are variance and volatility swaps. A volatility swap is a forward contract on future realized price volatility. Similarly, a variance swap is a forward contract on future realized price variance, variance being the square of volatility.
http://docs.fincad.com/support/developerfunc/mathref/varianceswaps.htm
from decline in the underlying) strategy, selling a put option is a bullish strategy (profits from. a rise in the underlying). While the direction of the underlying is the primary driver of profits. and losses from buying or selling options, the volatility of the underlying is also a driver.
https://cfe.cboe.com/education/tradingvolatility.pdf
what are volatility swaps
A volatility swap is a forward contract on future realized price volatility.