Top 10 Innovative Approaches to Trading Variance Swaps in Volatility Markets
The derivatives market has elevated volatility trading from a hedging afterthought to a sophisticated asset class. Institutional investors now harness the variance risk premium (VRP) as a primary source of alpha. Three standout strategies are reshaping the landscape.
Corridor variance swaps filter out tail-risk premiums by accruing value only when assets trade within predetermined bounds. This cost-efficient structure benefits from recycled vega in structured products. Meanwhile, simple variance swaps abandon traditional weighting models to better hedge against market jumps—proving resilient during crises where classic replication fails.
Cross-asset dispersion trades exploit arbitrage opportunities between index-level variance and constituent stock variances. The strategy thrives on mathematical dislocations, offering uncorrelated returns in turbulent markets.
