Varactor diode is a type of PN junction diode where the capacitance of the PN junction can be controlled by applying a reverse bias voltage. As the reverse bias voltage is changed, the width of the depletion region between the P and N semiconductors changes, altering the capacitance. Varactor diodes are commonly used in applications like variable resonant tank circuits, automatic frequency control circuits, and frequency modulation in radios and televisions. They operate by varying the capacitance through adjustment of the depletion region width, similar to how the distance between capacitor plates controls capacitance.