Zomma
Candlefocus EditorZomma measures how the gamma of an option changes as the implied volatility increases or decreases. Gamma is the measure of how much the value of an option changes, it is inversely proportional to the price. As implied volatility (IV) increases (decreases) so does the price of the option, and thus the gamma decreases (increases). The higher the zomma is, the more sensitive the option is to the changes of the volatility.
To calculate zomma, one takes the second derivative of the gamma with respect to IV. The result is related to the vega of the option, which measures the sensitivity of the option to the volatility of the underlying security. If the value of the vega is high, the option will have a higher zomma and be more sensitive to the changes in volatility. Conversely, if the vega of the option is low, the option will have a low zomma and be less sensitive to the changes in the volatility.
The use of zomma helps traders to better understand the risk of their investment. Zomma is one of the minor Greeks that is used to manage higher-order risk in derivative trading, as it measures the option’s sensitivity to the changes in the implied volatility. By understanding the sensitivities of their investment, traders can actively manage their position to protect against potential losses and maximize returns.