Variance Swap Fair Value

Q: What is a variance swap?

Derivative paying the difference between realized variance and a pre-agreed strike. Fair value computed by integrating option prices.

Q: How is fair variance computed?

FlashAlpha integrates across the SVI surface using the standard replication formula: sum(OTM option prices / strike^2).

Q: Why does Variance Swap matter for trading?

Variance swaps are the institutional way to trade vol directly — without the distractions of delta, gamma, or time decay that options force on you. For serious vol traders, variance swaps are the cleanest vol expression; for retail, the same economics are approximated via short/long straddles hedged for direction.

Q: When is Variance Swap good versus bad for a trader?

Good for sellers when fair variance exceeds realised — harvesting the variance risk premium. Good for buyers pre-events or in stress regimes. Fair-strike ≈ realised means no systematic edge. Alpha tier required for fair-strike data.

Canonical definition, formula, interpretation, and API reference.

Definition

Fair variance per expiry computed from SVI integration. Used for variance swap pricing.

Formula

Fair Var = (2/T) x integral [C(K)/K^2 + P(K)/K^2] dK

Integrated across SVI-fitted option prices.

Inputs

SVI-fitted surfaceforward pricestime

Output

variance_swap_fair_values per expiry

Interpretation

Fair > realized: vol sellers have edge
Fair < realized: vol buyers have edge (unusual)
Used by institutional desks for var swap pricing

API Reference

Endpoint

GET /v1/adv_volatility/{symbol}

Tier

Alpha+

Response field

variance_swap_fair_values[]

Why Variance Swap Matters for Trading

TL;DR

A variance swap pays realised variance minus fair variance. It's the cleanest direct exposure to vol — no delta, no gamma, pure vol.

What it measures: An OTC contract paying RV² - K², where K is the fair-variance strike derived from the option chain.
What it signals: The market's model-free forecast of future realised variance.
Why we measure it: Options give you vol exposure contaminated with delta, gamma, and time. Variance swaps give you pure vol.
Who uses it: Institutional vol desks, hedge funds, macro PMs. ALPHA TIER.

How to read Variance Swap

Variance swap premium (sellers)

Fair-strike above realised
Sellers collect variance risk premium
Structural short-vol edge
Similar mechanics to VRP

Good for: systematic variance sellers

Variance swap discount (buyers)

Fair-strike below realised
Buyers profit on surprises
Event hedges
Long-vol tail protection

Good for: hedge buyers, event setups

Fair-strike ≈ realised

No structural edge
Trade direction or skew
Pure vol bet fails
Atypical regime

Fair

Rules of thumb

Variance is directional through volatility. Short variance is equivalent to short vol — but with cleaner exposure (no gamma or theta).
Pair with variance surface. Fair strike is derived by integrating the variance surface.
Institutional-only. OTC contracts; not retail-accessible directly.
Blow-up risk without hedge. Unhedged short variance has uncapped loss — same as unhedged short options.
Alpha-tier signal. FlashAlpha computes fair strikes off the SVI fit — Alpha tier only.