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?
Variance swap basis is the basis between theoretical value of the variance strip and the actual strikes traded in the brokers' market.
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.