Variance Swap Concept Trade

Entry Logic

• Entry trigger: A significant difference between the implied variance and the expected realized variance.
• Confirmation: The difference is at a historical extreme.
• Timeframe: Not applicable.
• Location context: Not applicable.
• Market condition: The market is mispricing future variance.

Exit Logic

• Profit target: When the realized variance converges with the implied variance.
• Scaling out: Not applicable.
• Trailing stop: Not applicable.
• Signal failure exit: The realized variance diverges further from the implied variance.
• Opposite signal exit: Not applicable.
• Time expiration: At the expiration of the variance swap.
• Momentum loss: Not applicable.

Stop Loss Structure

• Hard stop: A predefined loss level on the variance swap.
• Soft stop: If the realized variance does not start to converge with the implied variance.
• Max dollar loss: 2% of account capital.
• Max percent loss: 2% of account capital.
• Structural stop: Not applicable.

Risk Management Framework

• Risk per trade: 1% of account capital.
• Daily limit: Not applicable.
• Weekly limit: Not applicable.
• Max drawdown: 15% of account capital.
• R:R requirement: Minimum 2:1 risk-reward ratio.

Position Sizing Model

• Sizing approach: Position size based on the notional value of the variance swap.
• Volatility adjustment: The strategy is based on the variance spread.
• Conviction sizing: Not applicable.
• Scaling in: Not recommended.
• Scaling out: Not recommended.

Trade Filtering

• Market conditions to avoid: When implied and expected realized variance are in line.
• Specific setups required: A large difference between implied and expected realized variance.
• Instruments: Variance swaps on major indices.
• Time restrictions: Not applicable.
• Chop/news avoidance: Not applicable.

Context Framework

• Trend direction: Not applicable.
• VWAP relationship: Not applicable.
• MA relationship: Not applicable.
• Range location: Not applicable.
• Higher TF alignment: Not applicable.

Trade Management Rules

• Breakeven: Not applicable.
• Scale out: Not applicable.
• Add size: Not applicable.
• Fast vs slow moves: This is a slow-moving trade.

Time Rules

• Optimal window: When there is a large difference between implied and expected realized variance.
• Times to avoid: When implied and expected realized variance are in line.
• Session notes: Not applicable.

Setup Classification

• A+ setup: A historically large difference between implied and expected realized variance.
• A setup: A significant difference.
• B setup: A moderate difference.
• C setup: No difference.

Market Selection Criteria

• Instruments: Variance swaps on major indices.
• Volume: Not applicable.
• Volatility: The strategy is based on the variance spread.

Statistical Edge Metrics

• Win rate: 60-70%.
• Avg win: 2R.
• Avg loss: 1R.
• Profit factor: 1.8.
• Expectancy: 0.6R per trade.

Failure Conditions

• When strategy fails: When the realized variance diverges further from the implied variance.
• Specific scenarios to avoid: Not applicable.

Psychological Rules

• Mental discipline: A deep understanding of variance swaps and volatility dynamics.
• Key mental discipline requirements: Patience to wait for the convergence.

Advanced Components

• Regime detection: Not applicable.
• Filters: Not applicable.
• Correlation: Not applicable.
• MTF alignment: Not applicable.

Location

• Where strongest: When there is a large, statistically significant difference between implied and expected realized variance.
• Where weakest: When implied and expected realized variance are in line.