How does delta change when implied volatility changes? This measurement is called “vanna.” Because vanna is a derivative of delta, it is categorized as a “second-order” Greek. As the implied volatility of an option increases, the probability of that option moving into the money also increases. For this reason, vanna is positive for call options and negative for put options.
Example of Vanna
Steve is an options trader and decides to purchase $175 call options on ABC Holdings and 123 Computers. The call option for ABC Holdings cost him $1, and the option call for 123 Computers cost him $10. The gap in the options prices of each is due to the difference in implied volatility and delta. Below are additional details of each company for this example: However, if 123 Computers’ stock price increases by just $1, the option price will likely go up by much more as a result of the larger implied volatility inherent in the nature of its business (an innovative and fast-changing computer and technology company).
What It Means for Individual Investors
Most individual investors will likely never use vanna in their trading strategies unless they are heavy options traders or manage a hedge fund of options for a major institution. However, understanding how vanna works provides additional perspective for investors wishing to further their knowledge of trading options and related options trading strategies. Always consult a financial professional before making major investing decisions.
