Vomma
| Vomma |
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Vomma is a measure of the rate at which vega changes when market conditions change. It is found in the 'Greeks' group of measures that are used to price options. This group includes other measures such as delta, gamma, and vega. Vomma in its model contains characteristic changes concerning vegas, which during interpretation help to understand what will happen to the value of the option[1].
Greeks in finance
The names used in risk assessment, risk measures, and collateral parameters are taken from the Greek language. In finance, Greeks use variables that affect the underlying parameters, which are the value of financial instruments. Greeks ensure that the portfolio is properly balanced and the risk is low. They examine even the smallest change in the underlying portfolio.
Each model serves to simplify and clarify changes. The Black-Scholes model is the simplest and most commonly used model to calculate price changes, time changes, general changes and collateral, using delta, theta and vega measures.
Greek derivatives are divided into three ordered instruments[2][3].
A Vomma as a second-order derivative will indicate vega changes when interpreting a variable of the underlying instrument. A positive value means an increase in value, a negative value means a decrease. The convexity of the Vomma indicates that the increase in a percentage point will also be reflected in the increase in the value of the options, and what will be visible in the vega because the convexity will also appear. They are mutually correlated.
To make profitable options trades, you need to examine the factors that will help you understand what will happen - Vomma and Vega. They are inseparable and to understand one thing you need to know the other[4][5].
Vega as integers in the range from -20 to 20 - usually allow you to determine the change based on the measured case when its value changes by 1%. For example, when the project we sell and its value drops by 10 vegs per 1000 euro, in such a case it means a profit/loss of 10 euro for each percentage decrease/loss increase in value[6][7].
What should the investor do? It all depends on what options he has[8]:
- If he is the owner or manager of short-term options, negative vommy values will be more advantageous for him.
- Long-term options should give investors a better return with a positive exchange value.
We calculate it with the formula:
- Vomma = (∂*v)/(∂*σ) = (∂2*V)/(∂*σ2)
The most commonly used model for trading options is the Black-Scholes pricing model. Vega and Vomma have a key role to play in this model to interpret and make the right decision[9][10].
Footnotes
References
- Allen S. L. (2013)., Financial Risk Management, John WIley & Sons, USA
- Freedman J. (2007).,Understanding Autocalls: Real Time Vega map , Oxford University Press
- Lynn B. W., Coffey B.J. (2009).,Risk Management and Trading Strategies for Financial Derivatives: Foreign Exchange (FX) & Interest Rates (IR), CERN Academic Training
- Roring J. (2017).,Volatility and variance swaps, Umea
- Ursone P. (2015)., How to Calculate Options Prices and Their Greeks: Exploring the Black Scholes Model from Delta to Vega, John Wiley & Sons, Padstow
Author: Dawid Kuczowicz
