I found two highly correlated assets that have spread in 3M realized and implied vol at historical minimum. To go long on this spread I thought of using two variance swaps.

Would it be cheaper to use two straddles instead? How would I price the variance swaps and how would correlation between the two assets enter my payoff? Finally, should I match the vega or variance notional and what would be an appropropriate strike?

  • $\begingroup$ When it comes to this topic I like this paper: wwwf.imperial.ac.uk/~ajacquie/index_files/… $\endgroup$ – Vitomir Jul 9 '19 at 7:54
  • $\begingroup$ Before trying to answer your question, can you say more about the assets, and also the currency denomination of the assets? For instance, are the assets single name stocks, or equity indexes, are they denominated in different currencies, how liquid is the options markets of these two assets? $\endgroup$ – Frido Rolloos Jul 9 '19 at 8:32
  • 1
    $\begingroup$ the assets are two currency cross denominated in USD. Options are not so liquid $\endgroup$ – lokaire Jul 10 '19 at 20:55

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