I’m interested in variance swap. Considered from its feature, variance swap is used for betting the (historical) volatility of underlying asset. If we use it for hedge tool of Vega or Volga, does it practically work? And, what is the market scenario in which variance swap is better than straddle(usual hedge tool of Vega)?

  • $\begingroup$ See a very detailed account here: quantlabs.net/academy/download/free_quant_instituitional_books_/… $\endgroup$ – Magic is in the chain Sep 24 '18 at 18:50
  • $\begingroup$ Thank you for the link. Actually, I read the document. A lot of things about variance swap are written, but I can’t find sentences about its usage for hedge tools. I think it is good way for variance swap to use as a hedge tool for Vega. Because, it has little delta and vanna compared to the straddle. $\endgroup$ – user35893 Sep 24 '18 at 22:19
  • $\begingroup$ Correct, the variance swap has a cleaner exposure to volatility then the straddle. But you have to take a bit of care if you use it for hedging how you define your variance swap vega, and how you define your options book vega. I presume your question is about hedging the vega risk of an options book with varswaps. $\endgroup$ – Frido Rolloos Oct 25 '18 at 0:43

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