1/ Learned a lot about variance swaps by reading through @EmanuelDerman's awesome paper. This inspired me to replicate a variance swap term structure for #BTC by using options data from @DeribitExchange.
2/ During my research I read about the first #BTC variance swap between @GSR_io and @BlockTower which occurred in the summer of 2019. Given the lack of public data for these swaps, the only real way to get a decent price estimate is to use a replicating portfolio of options.
3/ These variance swaps allow for traders to make outright bets on volatility^2. Instead of using options (ie: straddles), with these products there is no need to delta-hedge. The payoff is as follows:
(Realized Variance - Strike Variance) x Notional
4/ At inception, the fair value of the swap should be zero, therefore, we have to use some formulas to find the correct strike variance to make this happen. I'd suggest those interested in the math to review the paper for a detailed technical explanation.
5/ Despite the lack of a well established #BTC options market, I was happy to see a variance swap term structure which made intuitive sense with respect to the current upward sloping ATM IV curve.
6/ Excited for #BTC variance swaps to grow in popularity and for the savvy folks at @opyn_ , @PrimitiveFi, @HegicOptions and elsewhere to BUIDL the next generation of DeFi exotic derivatives!
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