Volatility Swap

A volatility swap is a forward contract that allows a participant to trade the future realized volatility of an underlying asset against a fixed strike volatility. At expiration, the holder receives a payoff based on the difference between the realized volatility and the strike volatility, multiplied by a notional amount.

These instruments are used by traders to speculate on the intensity of price fluctuations or to hedge against volatility risk without having a directional view on the asset price. In the crypto market, where volatility is a defining characteristic, volatility swaps are essential tools for professional traders and market makers.

They allow for direct exposure to the "fear" or "calm" of the market. Because volatility is difficult to predict, these swaps require complex modeling of the variance of the underlying asset.