A typical option pays off based on the difference between the actual price of an underlying asset (like a stock) and a particular strike price. Buy a call option with a strike price of $20 a share, and you're hoping that the actual price of the stock rises above $20. If it hits $25 on the expiration date, you make a profit of $5 a share.
A volatility swap works based on volatility rather than price. It's a forward contract that pays off based on the difference between the actual volatility an asset showed compared to the projected volatility as laid out in the derivative contract. This projected volatility works like a volatility strike. The swap acts as a bet that the realized volatility will be more than the volatility strike.
To give a little background, volatility measures the amount an asset's price moves around. A stock that stays in a range between $9.00 and $9.25 over a long period of time has very low volatility. Meanwhile, a stock that bounces around between $10 and $50 would have very high volatility.
Volatility doesn't care about direction. A big move up or a big move down...both represent a stock with high volatility. A volatility swap is just a bet on a certain amount of movement, without taking a guess as to...which way. It allows an investor to bet just on the size of the move, rather than predicting whether it will be up or down.
It's like asking someone to marry you on the third date. You're likely to get a big reaction one way or another...but it's tough to predict which way it will go.
Related or Semi-related Video
Finance: What is the U.S. Mint?4 Views
Finance allah shmoop what is the u S mint It's
this tasty sweet smelling plant that can be grown in
the united states So it's you know us mint But
it's not the u S Mint that would be this
place and these three places actually yeah there are currently
for mints in use one each in philly san francisco
denver in a west point So what exactly do they
do there Take mint plants and convert them into delicious
melt in your mouth treats so we can cleanse our
palace after a hefty meal at our favorite garlic filled
italian restaurant Well no not quite The u S Mint
is responsible for one hundred percent of our coinage That's
pennies nickels dimes quarters of this one Whoever that busty
woman is if it can be found in a change
purse It started out here or here or here or
here Well the u S Mint was created by congress
in seventeen ninety two when our forefathers realized that there
was no way to make any of the jukebox is
work So yeah we needed small change because well back
in their day pretty much the only thing that cost
over ninety nine cents was a thirty foot yacht or
a trip around the world on a mule so we
needed something other than paper currency that started at a
dollar And while the u S Mint was born well
the mints use precious ish medals but not so precious
that they're not willing to melt them and crush them
and form them into likenesses of dead presidents Well the
medals are fed through a series of fancy machines until
coins pop out on the other end Well typically the
quarters and dimes and so on that we use on
a semi regular basis but sometimes also commemorative coins Yeah
that's included in there too Well like when the country
turns two hundred years old when we want to recognize
an important person or event from history or when you
know workers that the men are bored of coining aeneas
Now this is all what they do Additionally there's a
facility at fort knox where all of the u S
Bullion is stored and no gold and silver bullion not
bullion Birbal yang's you difference in french but don't get
any crazy ideas about robbing the place That would be
like while trying to break into fort knox common misconception
the mint doesn't print paper currency that would be under
the purview of the bureau of engraving and printing which
will also put your loved one's name on a champagne
flute for just twenty nine ninety five So yeah the
u S mint does coins The bureau does dolla dolla
bills right Those annual crosstown softball cames really gotten pretty 00:02:31.958 --> [endTime] fierce
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