Vomma and Your Options Trades

What Is Vomma?

Vomma is a second order option pricing Greek that describes how Vega will change given a one point change in implied volatility, but understanding that is just the start of opening the doors to a deeper understanding of volatility.

Vomma and Your Option TradesWe do not typically hear much about Vomma, as it is not one of the four option Greeks we typically learn about or discuss. In fact, many retail options traders have never heard of this particular Greek before and most will not really understand what Vomma is all about. It is time that we change this.

A discussion about Vomma might begin by saying that Vomma is the rate at which Vega will change. We might also start by saying that Vomma is to Vega as Gamma is to Delta. Both are apt descriptions, but probably leave most people scratching their heads trying to make the mental connection.

Vomma describes how an option’s Vega will change with changes in the underlying volatility. If you have a positive Vomma and volatility rises, so will the Vega or your option position. If volatility falls, a positive Vomma tells you that your Vega will decrease along with volatility. A negative Vomma suggests an inverse relationship. Vega will rise when volatility is falling, and vice versa.

So, with positive Vomma, a position will become long Vega as implied volatility increases. It will also tend to get short Vega as implied volatility decreases. The nice thing about a positive Vomma is that your option position tends to be somewhat in synch with changing volatility.

Consider an option trade that seemingly adjusts its Vega automatically in response to the rise and fall of implied volatility. For monthly income traders this poses something of a dilemma, though. Most of the more popular income trades do not provide traders with a positive Vomma, because positive Vomma is acquired through the purchase of out-of-the-money options.

As income traders we are typically net sellers of the out-of-the-money options contracts, leaving us with negative Vomma in our trades. All is not lost, however!

The popular monthly income trades can be modified to provide the desired Vomma where and when you might want to see it come into play with your trades. In fact, some retail traders who have been trading for a while may already be employing techniques that provide positive Vomma without knowing that they are doing it.

We have been doing this in the Trading Room for years now! Come join us if you would like to see the techniques that we are using.

Visit us in TheOptionClub.com’s Trading Room to learn more about the option Greeks, including Vomma, and how you can master them to design highly effective option trades.

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