A long straddle is when one is anticipating a swing in stock price, but you’re not sure which direction it will go.

And a variance swap is a financial derivative used to hedge or speculate on the magnitude of a price movement of an underlying asset.

So it seems that both are bets on volatility, what is the better way to bet on volatility?

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    A long straddle has directional and volatility components. One can add to the other or negate the other. – Bob Baerker Feb 11 '19 at 18:31

They are not directly comparable because they have different payout structures. A long straddle will pay out if the underlying moves a significant amount in one direction or the other and ends up in the payout range. A variance swap pays out if the volatility of the underlying increases regardless of where it ends up.

So take a stock that moves a small equal amount up each day and ends up in the "high" payout zone of the straddle. It's not really "volatile" since the price moves are consistent, so the straddle would pay out but the variance swap would not. On the other hand, take a stock that swings wildly from day to day but ends up at roughly the same spot (the mid range of the straddle). The straddle would NOT pay out but the variance swap would.

So it really depends on what you're expecting as to which is "better".

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  • Thank you, how do I see variance swap pricing data, that is to say how can they be traded? I understand how to trade options through my broker, but how does one trade variance swaps? – JDK Feb 11 '19 at 20:49
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    I do not know of any exchange-traded volatility swaps, but there are similar products on major indices (VIX, EVAR) that your broker might support. – D Stanley Feb 11 '19 at 21:08
  • So the VIX is a variance swap, volatility swap, or behaves similar to one or the other, or is neither? – JDK Feb 11 '19 at 21:30
  • VIX is a volatility index that you can trade futures on (if your broker supports them). – D Stanley Feb 11 '19 at 21:50

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