Variance Swap Volatility and Option Strategies
Marco Avellaneda

A variance swap  is an OTC contract  in which counterparties exchange  the  (future) realized variance of an asset  against a fixed  nominal variance. The fair value of the nominal variance, or Variance Swap Volatility (VSV), is a useful quantity that predicts the unconditional  variance of assets returns  over the  period of interest.  I suggest that the VSV can be a  useful statistic for  managing option positions.