Variance Swap Replication Intuition

This app seeks to illustrate the replication of a variance swap using a portfolio of options. The key insight is that variance can be captured by dynamically trading a portfolio of puts and calls, with weights inversely proportional to the square of their strikes (1/K²). This weighting scheme creates a combination of options that, when hedged, maintains a constant exposure to realized variance regardless of the underlying asset's price movements.

Option Parameters

Variance Swap Replication Parameters

Option Weights vs Strike

050100150200
  • Weight

Portfolio $Gamma Profile

0200
  • Portfolio $Gamma