Vega Notional / Variance Notional

The notional for a variance swap can be expressed either as a variance notional or a vega notional.

The variance notional represents the P&L per point difference between the strike squared (implied variance) and the subsequent realised variance.


Since most market participants are used to thinking in terms of volatility, trade size is typically expressed in vega notional. 

The vega notional represents the average P&L for a 1% change in volatility. 

The vega notional = variance notional * 2K 


The P&L of a long variance swap can be calculated as:  Vs formula

When RV is close to the strike, the P&L is close to the difference between IV and RV multiplied by the vega notional. 

The variance swap payout, expressed in vega notional, is locally linear around the strike. 


Vega and variance notionals


The P&L of a variance swap is often expressed in terms of vega notional.

For a vega notional of €100k, a gain of €500k is expressed as a profit of 5 vegas (i.e. 5 times the vega notional).  

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