Like any swap, you agree that at some point in the future you going to get paid the difference between some current level and the value that actually realizes. In this case, it would be the value of realized variance against the pre-agreed strike K:
return[i] = log( SPX[i]/SPX[i-1] )
V = sum{i=1 to N} return[i]^2/N
pnl = Notional * (V - K^2)/(2*K)Infamous?
Sounds just like me. But you're welcome.
I am heading to bed and will write something comprehensive tomorrow (no promises, sadly). The general idea is that if you can't trade variance swaps, understanding what variance players are doing will help you with a few things:
(a) what delta hedging flows will be due to large positions in variance swaps
(b) who and how will blow up when var swap positions go sour
(c) how variance swap positions/flows filter into exchange-traded products such as SPX options and VIX futures
Really.PoopyDeek said:
@tommcginnis relax, I have been called names much worse than that in the years I am here.
On the other hand, in his defense, @PoopyDeek is a really great trader, outspoken, yes. He did us a great service exposing many frauds and fakes here to prevent them from taking advantage of newbies like me. So I am also his fan.@tommcginnis relax, I have been called names much worse than that in the years I am here.
It doesn't bother me a bit. Why should I? They told me I was dumb, and I admit. They said I was a loser and I admit. They said I was a moron, no big deal.... It is an anonymous forum we are all anonymous, I only care about folks who are kind, generous and helpful and there are too many to mentioned here.
Take care, be careful and make sure you practice physical distancing and psychological distancing.
I am not Sle and Sle is not me. Very important point, should SEC ask
Assuming the dealer has a perfect hedge on (i.e. the strip vs the variance swap), he does not have any gamma intraday, he only going to have to hedge the daily reset. I.e. he does not actually have any gamma because his convexity is perfectly matched. Granted, this is not always true (e.g. large gaps are going to disconnect your hedge from the swap) but it's true enough that most dealers are not gonna bother unless the move is huge.
That's the tricky question. You can use the clearing house history to see the flows and attribute them, pretty sure that data is publicly available from the clearing house. Alternatively, you can look at the strength of the previous impacts and try to back out the size of the outstanding gamma.
Well, the dealer only cares about the variance swap payoff that's calculated from the close to close returns. So from his perspective, even if he's marking the close, he's golden (if anything, he likes that impact if he's not fully hedged). But from the markets perspective, the market makers will pull back when they see the target-close imbalance and will buy it back into the settlement (thus making money to the retail guy that decided to play this game
)Please. Porn. Spankings. No more bikering.
Dealer and market makers are not the same entity?Well, the dealer only cares about the variance swap payoff that's calculated from the close to close returns. So from his perspective, even if he's marking the close, he's golden (if anything, he likes that impact if he's not fully hedged). But from the markets perspective, the market makers will pull back when they see the target-close imbalance and will buy it back into the settlement (thus making money to the retail guy that decided to play this game
For the purpose of this discussion, dealers are the guys trading variance swaps, usually these are index volatility desks at banks. Market makers are market makers in index futures, who are usually high frequency shops like Jump et al. Very different entities.
