What Is Vanna in Options?

Updated on November 16, 2022

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Definition

Vanna is a second-order derivative that measures the change in delta for any change in the implied volatility of an option. It is measured as the change in delta for every 1% change in implied volatility. In options trading, vanna will be negative for put options and positive for call options.

Key Takeaways

Vanna measures the change in delta for every 1% change in implied volatility.
It is a second-order Greek in trading options because it is a derivative of the Greek delta.
Vanna is positive for call options and negative for put options.

How Vanna Works

To fully understand vanna, you need to understand the popular Greek in options, delta. Delta measures how much an options price changes as the underlying security changes by $1 per share. Delta values can be anywhere from -1 to +1 with a value of 0, meaning the options price is unaffected as the underlying security’s price changes.

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:

	ABC Holdings	123 Computers
Stock price	$100	$100
Delta	0.05	5.00
Company description	A holdings company that owns several food chains, real estate, and retail stores (e.g., Berkshire Hathaway)	A computer manufacturer and software developer (e.g., Apple in its early years)
Implied volatility	Low implied volatility because the company's operations are very traditional, straightforward, and have been around for a long time; highly unlikely this company will change the world anytime soon.	High implied volatility because the company's operations are very innovative, and it has disrupting technology releases regularly

If ABC Holdings' stock price increases by just $1, the option price will remain relatively the same because it’s doubtful it will jump from $100 to $175 in the first place due to the nature of the business (a holdings company that has been around for decades).

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).

Let’s assume that a new development has occurred, and ABC Holdings has just announced the purchase of an online retailer that is poised to overtake the market share of Amazon. As a result, the implied volatility and delta of ABC Holdings have increased from 0.05 to 10. The measured change in delta and implied volatility resulting from the major company purchase is vanna.

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.

Frequently Asked Questions (FAQs)

What are Greeks in options?

The primary Greeks in options are delta, gamma, theta, vega, and rho, and each measures how different factors might affect the change in the price of an options contract. Second-order Greeks are derivatives of the primary Greeks and include vanna.

What is gamma in options?

Gamma measures the rate of change in an options delta and the underlying asset’s price. Like vanna, it is considered a second-order Greek.

How does implied volatility change delta in trading?

This change is measured with vanna. As the implied volatility of an option increases, the probability of that option moving into the money also increases. So vanna is positive for call options and negative for put options.

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Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

Merrill. “Delta.”
Talk Delta. “Why ‘Vanna in Options’ Is Very Important for Options Traders.”
Charles Schwab. “Get To Know the Option Greeks.”
Merrill. “Gamma.”