In case you wonder, no I didn’t just pull that one out of thin air, and yes it’s a real thing. In fact vomma is officially listed as one of the option Greeks (check it out over on Investopedia). And it also happens to be one of the more exotic indicators of implied volatility that is very carefully monitored by professional option traders. And let me assure you that they are ALL keeping a very close eye on it this very week. But why?
First let’s understand what vomma is and why we should care. The concept is actually quite simple. You may recall that gamma measures the rate of change in the delta of an option with respect to changes in the underlying price.
If you didn’t know that then don’t fret – it’ll all make complete sense to you in a second.
Basically vomma measures the rate of change in respect to changes in an option’s vega, i.e. implied volatility. So while the VIX – or by extension vega – measures the expected movement in the S&P 500, vomma measures the expected movement in the VIX. That’s the key difference.(more…)