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The Skinny on Options: Abstract Applications

The Vomma Smile

The Skinny on Options: Abstract Applications

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Vomma, the second derivative of the Black-Scholes Option Pricing Model, measures how Vega changes when implied volatility changes. Essentially, it measures the volatility of volatility, and the Vega-Vomma relationship with respect to volatility is no different than the Delta-Gamma relationship with respect to price.

Well, what is interesting about Vomma is that it actually peaks with far OTM options, somewhere around 5-10 Deltas. This means that while a super, high POP Short Put might look like an easy win, it can begin to rack up losses quickly if IV spikes from Vomma alone.

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