Winding up the 7th Annual Cboe European Risk Management Conference (RMC) on Friday, September 14, was a discussion of “Variance Utility Cases and Uses,” moderated by Michael Mollet, Head of Product Development at Cboe Global Markets.

Joining Mollet was Adel Benharrats, Portfolio Manager at Argentiere Capital, Markos Petrocheilos, Senior Equity Derivatives Trader, BNP Paribas, and Chris Rodarte, Lead Portfolio Manager at Pine River Capital Management.

The panel gave a general overview of Variance Swaps and how they are used in the market.  Over-the-counter (OTC) Variance Swaps are a complimentary product to Cboe VIX derivatives.  Cboe Futures Exchange offers a listed futures contract on the realized variance of the S&P 500 Index (ticker symbol VA).

Market participants use Variance Swaps to capture risk premium, Petrocheilos said, and the majority of the trades are for sale.  Other common trades discussed by the panelists were Variance Swaps against at-the-money straddles and correlation-dispersion trades.

Rodarte discussed that prior to 2008, liquidity in OTC Variance Swaps was much more robust than in the current environment. In addition, Rodarte said he compares OTC Variance Swaps vs. the pricing of the VIX derivatives complex to determine the right instrument to use.

Forward variance was discussed by the group as a more sophisticated type of trade, and a closer representation to VIX derivatives.

The group’s discussion concluded by highlighting the fact that the various maturities and pricing discrepancies  between VIX derivatives and OTC Variance Swaps provide compelling trading opportunities.
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