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Capital Markets

Equity volatility: Strategies

Variance swaps and contingent variance swaps allow for a number of trading strategies.

Equity volatility: Betting on turbulence

Equity volatility: The technicalities of a variance swap


Buying up-variance: If the underlying price is expected to rise or stay above a given level then buying an up-variance swap (with a 95% trigger for example) is a cheaper alternative to a long variance swap position because it has a lower break-even and a lower cost of carry. A relative value trade using an up-variance swap would consist of buying up-variance and selling a variance swap with the same maturity in order to capture the difference in strikes.

Selling down-variance: If the underlying is expected to stay below a given level then selling a down-variance swap (with a 105% trigger for example) could be more attractive than selling a variance swap because it has a higher strike, and therefore higher carry, and a higher break-even. Selling conditional down-variance could be a useful strategy for investors who expect that a market sell-off will be associated with moderate volatility. A relative value trade could consist of selling a down-variance swap and buying a variance swap.
Carry strategy using corridor variance swaps: a corridor variance swap lets investors take exposure to the variance of an underlying instrument when it trades within a pre-specified range.


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