Volatility & advanced strategies
What is a Variance Swap and how does it differ fundamentally from trading standard vanilla options?
By Easy Money Scanner · Educational reference · Not investment advice
The short answer
A variance swap is an OTC derivative paying the difference between realized variance of an underlying's returns and a fixed strike variance, offering pure volatility exposure without the delta hedging and path-dependency of vanilla options.
How it works
Unlike options, variance swaps have payoffs linear in variance rather than price, so traders gain direct volatility exposure without managing an options Greeks position or worrying about strike selection.
An example
VIX itself is derived from a variance-swap-style replication formula using a strip of SPX option prices across strikes, per Cboe's published whitepaper.
Risk & limitations
Variance swaps are OTC instruments carrying counterparty credit risk and are typically accessible only to institutional investors, not retail traders.
Examples are hypothetical, not trade recommendations. US contract and regulatory references do not automatically apply in Canada. Rules, margin requirements and broker policies can change; confirm them with the relevant authority and your broker.