# Why would one prefer variance swaps over other instruments?

I understand that an investor who has a view on an underlying's variance would be tempted by a variance swap. But why would one prefer such a contract over another instrument whose value is based on volatility, eg. options ?

• There are adv and disadv to both. For example options are exchange traded (more transparent, easier to access) while varswaps are OTC. However a portfolio of options is more complex to manage than a single varswap. And so on. – Alex C Jun 12 '16 at 1:22
• @AlexC it would be better to write a complete answer if possible, here we can feel you know a lot on the topic so it would benefit the site to have an elaborate answer. – SRKX Jun 12 '16 at 8:43

Clearly, from a theoretical point of view, a varswap is a better way of capturing volatility change, since as mentioned by Mark Joshi a varswap has, by construction, a Vega that does not vary with the stock price. For a single option on the other hand the Vega is at maximum at a stock price $S^*$ roughly comparable to the strike price X and decays in a "bell shaped" fashion for stock price higher or lower than this. (The modal Vega stock price is $S^*=X\exp((-r-\frac{\sigma^2}{2})T$), "below but close to X", as Mario Draghi would say).