The Other Vanna

Do you ever hear the "cool kids" in the option world talking about "vanna" and wonder what they are referring to?  They seem obsessed with Vanna's moves.  Thinking it was strange they were so interested in a game show host, I did a little research.  

My conclusion?  If you ever hear anyone making jokes at Wheel of Fortune's Vanna White's expense, they are idiots.  This woman has got it all figured out.  She works four days a month, makes somewhere between $4 and $10 million a year, and is worth more than $100 large.  Vanna is a genius!

It still seemed strange that Vanna was constantly been cited in option trading forums, so I kept digging.  It took me a couple of months, but I eventually figured out that SPX option traders were not talking about Vanna White.  Instead they were talking about another convoluted mathematical option concept.

Vanna is the change in delta due to a change in volatility.  Got that?  Yeah, I know, these option traders love giving fancy names for complicated second derivative-type measurements.

However, instead of just blowing this off as the domain of finance geeks, I suggest you take the time to understand this concept as it is driving market moves much more than you probably guess.

Probably the easiest way to explain the concept of vanna is to make an example.  Once again I will create a typical dealer position.  Please note I am aware this is a huge generalization and if the dealers' position are different, then vanna could be the exact opposite of my analysis.  However, this is how dealers have been typically set up over the recent past.

For my example, I am altering the hedging volatility of both the call and put higher by 1%.  The call was originally 11% and it moves to 12%.  The put was 16.5% and it rises to 17.5%.  In the real world, the put probably rises more than the call, but the purpose of this exercise is to show the change in delta as volatility rises, so I thought I would just keep it uniform.

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