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?
Whatever it is, it clearly is not a common term of art in the industry. Three possibilities come to mind:
- To the options: Since one can (under certain assumptions about continuity etc) synthesize a variance swap from European option contract prices, the basis may represent the difference between varswap price and the synthesized price.
- To the VIX: If we are talking about SPX variance swaps there is a convexity-related basis to the VIX futures.
- To another tenor: As with futures, there is a calendar basis in variance swaps.