Quote from sle:
I think people understood that they are selling convexity but could not find anything to do. It is a pretty frequent occurrence - people can't find anything worth doing, but have to do something so they throw shit at the wall and see if it sticks. Most times it sticks, but sometimes it falls on their heads. There is other "awesome" stuff people have done, like sell conditional variance - "well, you are selling var at levels where it has never been before, so how could you lose".
No, I think variance futures have not taken off simply because its complex (some of it by nature and some of it by how CBOE decided to do it to mirror variance swaps in OTC markets), transactions are very costly (CBOE are idiots, should have made it trade in 10s of var units). Probably the key reason is that they did not really put much effort into grabbing the market share away from the OTC dealers - I was hoping that hedge funds like mine would preferr to get crossed on the exchange, but the fees are high and clearing costs per contract are even higher.
Volatility swaps are not fungible, (vol swap mark to market and residual vega are dependent on the prior volatility and is not consistent with the current strike - you can prove it to yourself), so it's not really possible to make a futures contract out of it.
), that vol swaps and variance swaps are not exactly the same thing, that dGamma/dSpot and dVega/dSpot are second order but do matter etc. Some people have been accumulating these risks for years and cashed in or checked out.