Simulate a VarSwap with the Options Strip

[newwurldmn]

I'm trying to mimic a varswap using the listed strip for trading purposes.

Anyone have a good rule of thumb to simulate a varswap position using the listed strip. It's impractical to trade the whole strip. Just trading the 20 delta option will give you a reasonable level for the vol but not for a tradable structure.

What's a reasonable middle ground? For example, what if I sold the 10, 30, 50 70 delta (from the put side) options in the appropriate ratios? Or more simply just sold the 30 and 70 delta options on a ratio?

 

[Aquarians]

Emanuel Derman, "More Than You Ever Wanted to Know About Volatility Swaps", page 39.

http://www.emanuelderman.com/media/gs-volatility_swaps.pdf

 

[samuel11]

Hey New, this is how I model it at work. We used the paper from Derman (post above) and the one below from JPM:

Just what you need to know about Variance Swaps - Trade2Win

Let me know if you have more questions

 

[tommcginnis]

Nicely done, you guys.
Sweet.



(Sorry, but it's too rare to have a simple question, and then collaborative answers. Wish we had an "Applause" emoji. Heh!)

 

[Van_der_Voort_4]

Nicely done, you guys.

fixed that for you

 

[newwurldmn]

That's Sam and aquarians.

I will check out those papers. Do you know of a decent approximation for a varswap if I wanted to create the exposure synthetically with the listed strip trading the fewest number of lines possible?

 

[tommcginnis]

fixed that for you

Now THAT made my Friday. Jeez, Louise.......

((AND YOU CAN CUT&PASTE THEM!! {At least the "hands"} Cool!))

I need to live a bigger life....