Vomma is a second-order options greek that measures the rate of change of an option’s Volga (the sensitivity of volatility to the underlying asset’s price) with respect to changes in the implied volatility of the underlying asset. In simpler terms, it quantifies how much the sensitivity to changes in implied volatility itself changes as implied volatility moves. It is a convexity measure for volatility.
Mechanism
The mechanism of Vomma determines how responsive Volga is to shifts in market sentiment concerning future price fluctuations. A positive Vomma means that as implied volatility increases, an option’s Volga also increases, making the option more sensitive to further volatility changes. This effect is significant for options with longer maturities and those further out-of-the-money.
Methodology
The strategic approach uses Vomma to manage the sensitivity of an options portfolio to large movements in implied volatility. Traders employ strategies designed to have positive Vomma when they anticipate significant swings in volatility, allowing them to profit from such movements. For crypto institutional options trading, understanding Vomma is essential for sophisticated volatility traders who seek to position portfolios to benefit from substantial changes in the implied volatility surface of assets like Bitcoin or Ethereum.
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