Editing Variance swap (section)

==Uses==
Many traders find variance swaps interesting or useful for their purity.  An alternative way of speculating on volatility is with an [[option (finance)|option]], but if one only has interest in volatility risk, this strategy will require constant [[delta hedging]], so that direction risk of the underlying security is approximately removed.  What is more, a [[replicating portfolio]] of a variance swap would require an entire strip of options, which would be very costly to execute.  Finally, one might often find the need to be regularly rolling this entire strip of options so that it remains centered on the current price of the underlying 
[[security (finance)|security]].

The advantage of variance swaps is that they provide pure exposure to the volatility of the underlying price, as opposed to call and put options which may carry directional risk (delta). The profit and loss from a variance swap depends directly on the difference between realized and [[implied volatility]].<ref>{{cite web
  | last = Curnutt
  | first = Dean
  | title = The Art of the Variance Swap
  | publisher = Derivatives Strategy
  | date = February 2000
  | url = http://www.derivativesstrategy.com/magazine/archive/2000/0200col.asp
  | archive-url = https://web.archive.org/web/20090807040315if_/http://www.derivativesstrategy.com/magazine/archive/2000/0200col.asp
  | archive-date = 2009-08-07
  | access-date = 2008-09-29 }}</ref>

Another aspect that some speculators may find interesting is that the quoted strike is determined by the implied [[volatility smile]] in the options market, whereas the ultimate payout will be based upon actual realized variance.  Historically, implied variance has been above realized variance,<ref>{{cite journal
  | last1 = Carr
  | first1 = Peter
  | last2 = Wu
  | first2 = Liuren
  | title = Variance Risk Premia
  | publisher = AFA 2005 Philadelphia Meetings
  | year = 2007
  | ssrn = 577222
  | url = https://papers.ssrn.com/sol3/papers.cfm?abstract_id=577222
  | doi = 10.2139/ssrn.577222
  | s2cid = 13891424
 | access-date = 2020-07-07 | url-access = subscription
  }}</ref> a phenomenon known as the [[variance risk premium]], creating an opportunity for [[volatility arbitrage]], in this case known as the rolling short variance trade. For the same reason, these swaps can be used to hedge [[option on realized variance|options on realized variance]].