Volga, also known as vomma or vega convexity, is a second-order Greek that measures how an option's vega changes as implied volatility changes. While vega tells you the first-order sensitivity to volatility, volga reveals whether that sensitivity itself increases or decreases as volatility moves. Understanding volga is essential for sophisticated volatility trading and risk management.
What is Volga?
Volga is the second derivative of option price with respect to implied volatility. In simpler terms, it measures the rate of change of vega.
Simple definition: Volga tells you whether your vega exposure will increase or decrease as volatility moves. High volga means your volatility sensitivity accelerates as IV changes.
The name volga comes from combining volatility and gamma, as it plays a similar role for vega that gamma plays for delta. Just as gamma measures the curvature of delta, volga measures the curvature of vega.
Why Volga Matters
When you buy or sell options, vega is your exposure to volatility changes. But vega is not constant. As volatility rises, does your vega increase (making you more exposed) or decrease (making you less exposed)? Volga answers this question.
Consider two scenarios:
- Positive volga: Your vega increases as IV rises. You benefit more from each additional 1% increase in volatility.
- Negative volga: Your vega decreases as IV rises. Your volatility sensitivity diminishes as IV climbs.
Volga Characteristics
Volga by Moneyness
Volga varies significantly across strikes:
- ATM options: Have the lowest volga (close to zero or slightly negative)
- OTM options: Have the highest positive volga
- ITM options: Have positive volga, but less than OTM options
This makes sense intuitively. OTM options have low vega because they are unlikely to finish ITM. But if volatility rises significantly, those OTM options become more relevant, and their vega increases. This acceleration is volga.
Volga by Time
Longer-dated options generally have higher volga than shorter-dated options because there is more time for volatility changes to compound and affect the option's value.
Example: Volga in Action
You own an OTM call option:
- Current IV: 20%
- Vega: 0.10
- Volga: 0.005
If IV rises from 20% to 30% (10% increase):
- First-order effect (vega): 0.10 x 10 = $1.00 gain
- Second-order effect (volga): 0.005 x 10 x 10 / 2 = $0.25 additional gain
- New vega at 30% IV: 0.10 + (0.005 x 10) = 0.15
Your option gained more than simple vega would predict, and you now have higher vega exposure.
Volga and the Volatility Smile
Volga is closely related to the volatility smile or skew observed in options markets. The smile exists partly because of volga. OTM options have high volga, meaning they become increasingly sensitive to volatility as IV rises.
During market stress, when volatility spikes, OTM put options (with high volga) see their vega increase dramatically, making them even more expensive. This creates the characteristic steep skew during market selloffs.
Trading Implications of Volga
1. Volatility Convexity Trades
Traders seeking exposure to volatility moves often want positive volga. This means buying OTM options, particularly strangles or wings. If volatility explodes, positive volga amplifies your gains.
2. Premium Selling Risks
When you sell OTM options, you are short volga. If volatility spikes, not only do you lose from vega, but your vega exposure increases (due to negative volga from your perspective), accelerating your losses.
3. Hedging Vega Risk
Professional traders monitor volga to understand how their vega hedge will perform. A vega-neutral position might become significantly vega-long or vega-short after a volatility move if it has large volga exposure.
Volga in Portfolio Management
Example: Portfolio Volga
Your portfolio has:
- Long 20 OTM calls: volga +0.004 each = +0.08 total
- Short 10 ATM puts: volga -0.001 each = +0.01 total (short negative = positive)
- Long 15 OTM puts: volga +0.005 each = +0.075 total
- Total portfolio volga: +0.165
This positive volga means if IV rises 10%, your portfolio vega increases by approximately 1.65. You become more sensitive to further volatility moves.
Volga and Vol of Vol
Volga is related to the concept of volatility of volatility (vol of vol). Just as gamma hedging leads to realized volatility exposure, volga hedging leads to vol of vol exposure.
Traders who are long volga benefit when volatility itself is volatile. Stable volatility regimes hurt long volga positions because the convexity never pays off.
Practical Considerations
When Volga Matters Most
- Low volatility environments: OTM options have high volga, making them attractive vol bets
- Before major events: Uncertainty about IV direction makes volga exposure important
- Crisis periods: Volatility swings are extreme, amplifying volga effects
- Large positions: Small volga per contract compounds into significant exposure
Managing Volga Exposure
- Spreads reduce volga: Buying and selling options at different strikes partially offsets volga
- ATM options are low volga: Concentrating exposure ATM minimizes volga
- Diversify expirations: Different expirations have different volga characteristics
- Monitor during stress: Volga effects compound during volatility spikes
Volga vs Other Second-Order Greeks
The three main second-order Greeks each measure curvature in different dimensions:
- Gamma: Curvature of delta with respect to price
- Vanna: Cross-curvature of delta/vega with respect to volatility/price
- Volga: Curvature of vega with respect to volatility
Together, these Greeks describe how your option sensitivities evolve as market conditions change.
Track Your Volga Exposure
Pro Trader Dashboard calculates all Greeks including volga for your entire portfolio. Understand how your volatility sensitivity will change as IV moves and make better trading decisions.
Summary
Volga measures how vega changes as implied volatility changes, capturing the convexity of your volatility exposure. OTM options have the highest volga, making them attractive for traders seeking leveraged volatility bets. Understanding volga helps you anticipate how your vega exposure will evolve during volatility events and manage risk more effectively. While an advanced concept, volga is essential knowledge for serious volatility traders and portfolio managers.
Continue exploring advanced Greeks with our guides on vanna and charm.