The previous "release" was before Dodd-Frank - the expectation is that most volume will not come from retail pikers, but will be from institutional clients getting cleared through the exchange (to reduce the C/P risk, margin netting etc etc). Variance swaps are very popular products in the OTC markets, the question is if CBOE will do things right to capture that volume.
CBOE Variance Futures
- Thread starter sle
- Start date
What's the significance of the "variance strike"?
My best guess is.. it's just there as kind of a benchmark? So that as long as implied is at exactly what the variance strike was, and realized also happens to be variance strike, then the value of the futures contract = 1000?
But other than that, I shouldn't really care what the "variance strike" is once the contract is listed / trading?
My best guess is.. it's just there as kind of a benchmark? So that as long as implied is at exactly what the variance strike was, and realized also happens to be variance strike, then the value of the futures contract = 1000?
But other than that, I shouldn't really care what the "variance strike" is once the contract is listed / trading?
well if you sell a butterfly spread .. you have just swaped current implieds for future implieds.. meaning.. you took the fixed number and exposed yourself to the risk of the varying future realized number. the vol number you sold the butterfly at is what the variance strike represents.. there is gamma risk in equity flys.. they are trimodal to vega... . this variance strike verse realized vol is a pure vol trade.. its like trading the vol of the equity fly on the spx without picking strikes.. the actual implied number of all the strike space is the "strike" as it pertains to this product...
it is important for calculations going forward and its history..which means something if you believe in price dependence.
i might not be right about this.. but i figure someone will at some point correct me and help me understand.
w.r.t. ?
i was trying to express that selling a straddle atm or butterfly is some what like a variance swap.. maybe it makes no sense.. but your basically selling the current implied distribution at the risk of the varying future actual distro.. you sell a fixed implied and risk a varying future.. the varying future, or what actually happens is the realized vol..
obviously with equity flys they aren't pure vol plays.. the trimodal comment was to show how that your position changes with the underlying and how flys are different from selling variance directly... variance doesn't have modes.. if your short variance your short variance.. or at least thats what i was thinking... maybe thats not the way it came out..
maybe i'm completely off alot.. but throwing out my speculations as to what i think things are usually gets someone who knows a little better correcting me.. which is the point
netting = collecting margin requirements.. i gather..
realized vs. imp and to avoid the exchanging of cash flows (varswap).....
this is continuously exchanged in daily PnL on this exchanged traded product.. as opposed to discrete in OTC.. right.. ?
Quote from cdcaveman:
w.r.t. ?
i was trying to express that selling a straddle atm or butterfly is some what like a variance swap.. maybe it makes no sense.. but your basically selling the current implied distribution at the risk of the varying future actual distro.. you sell a fixed implied and risk a varying future.. the varying future, or what actually happens is the realized vol..
obviously with equity flys they aren't pure vol plays.. the trimodal comment was to show how that your position changes with the underlying and how flys are different from selling variance directly... variance doesn't have modes.. if your short variance your short variance.. or at least thats what i was thinking... maybe thats not the way it came out..
maybe i'm completely off alot.. but throwing out my speculations as to what i think things are usually gets someone who knows a little better correcting me.. which is the point
netting = collecting margin requirements.. i gather..
realized vs. imp and to avoid the exchanging of cash flows (varswap).....
this is continuously exchanged in daily PnL on this exchanged traded product.. as opposed to discrete in OTC.. right.. ?
cdcavemen,
If i buy varswaps, it's like long realized vol, short implied volatility today, so if implied vol goes up in the future, profit is the difference.
Is this correct?
I'm not really sure where you went wrong, so I can't give you specific advice... but no, the final conclusion is definitely not correct. Being long a variance swap means you're both long realized *and* implied vola.
Beyond the common sense answer of what a var swap is, you can also look at the equation for futures pricing provided by sle earlier in this thread. Higher implied vola translates into a higher implied term translates into a higher futures price = profits for your long position.
Once struck..by the snap shot of the spx's implies then its all realized vol that changes the price of the futures... if implies go up inside the lifetime of the contract then that doesn't necessarily mean realized vol increases. Implieds only are meaningful at issuance. Granted most likely if implieds go up inside the tenor realized vol will coinside but not nesecessaly.. ie non events... this is what I conceive to be right idk
If you buy varswaps your long vol... your buying future realized vol in relation to a strike derived from a snapshot of implied at issuance.. your not directly long implied or short implied... your long or short realized vol in relation to the issuance snapshot of implieds...
Being short implied vol would implicate you are exposed to changes in implied vol levels.. when your not here.. your only exposed to the Actual volatility that the spx realizes.