• A variance swap is a derivative contract in which two parties exchange payments based on changes in the price or volatility of the underlying asset.

  • Directional traders use dispersion trades to speculate on future asset volatility levels, spread traders use them to bet on the difference between realized and implied volatility, and hedge traders use swaps to cover short volatility positions.
  • If the realized volatility is greater than the strike, then the payout to maturity is positive.