Strategy lab
Every strategy from 151 Trading Strategies and all 101 Formulaic Alphas as formulas you can edit and backtest on ten years of daily stocks, ETFs, futures, forex and crypto data. Free, in your browser.
7.6VolatilityChart
Volatility trading with variance swaps
A variance swap pays the difference between realised variance and a strike set at inception, with no delta-hedging needed. The chart shows the payoff of selling one-month variance at VIX².
Note. Payoff per unit of variance notional. Large negative values mark volatility spikes such as March 2020.
Edit anything; the result updates as you type. Lines like window = 20 become sliders.
Hypothetical backtests on daily closes with no slippage unless you add costs. Survivorship bias applies: the stock list is today’s large caps. For learning, not investment advice. Data: Yahoo Finance via yfinance.
- Source
- 151 Trading Strategies
- Section
- 7.6 · Volatility
- Asset class
- Volatility
- In the lab
- Charted over time
Volatility trading with variance swaps (7.6)
A variance swap pays the difference between realised variance and a strike set at inception, with no delta-hedging needed. The chart shows the payoff of selling one-month variance at VIX².
Key equation
Lab formula
// Short one-month variance swap struck at VIX² a month ago
horizon = 21
strike = (delay(of("^VIX", close), horizon) / 100) ^ 2
realised = 252 * ts_mean(log(of("SPY", close) / delay(of("SPY", close), 1)) ^ 2, horizon)
strike - realisedPayoff per unit of variance notional. Large negative values mark volatility spikes such as March 2020.
More in Volatility
- 7.2 VIX futures basis trading
- 7.3 Volatility carry with two ETNs
- 7.3.1 Hedging short VXX with VIX futures
- 7.4 Volatility risk premium
- 7.4.1 Volatility risk premium with gamma hedging
- 7.5 Volatility skew – long risk reversal
Source: Kakushadze, Z. and Serur, J. A. (2018). 151 Trading Strategies. Palgrave Macmillan. SSRN 3247865. Summaries are our own.