How is volga different from vega and when does it dominate P&L?

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AcadiFi · Accepted Answer

Volga, sometimes called vomma, is the second derivative of option price with respect to implied volatility. Vega tells you the linear sensitivity, while volga tells you how that sensitivity accelerates as vol moves. Wings of the smile have high volga because far out-of-the-money options gain vega rapidly as volatility rises. Suppose a trader at a Helsinki fund named Nordholt Capital holds a long strangle on a biotech index. Each leg has vega of 1,100 and volga of 480 per vol point squared. If implied vol jumps from 28 to 34, pure vega predicts a gain of 6 times 1,100 equals 6,600 per leg. Volga adds roughly 0.5 times 480 times 36, or 8,640, nearly tripling the estimated P&L because convexity is meaningful over large moves. Volga dominates when vol moves are large, when positions are far from the money, and when the vol-of-vol is elevated, such as during earnings season or around central bank meetings. It is also the engine behind the skew premium earned by sellers of butterflies who are short volga. For CFA candidates, recognize that volga is positive for long option positions and makes volatility exposure convex, meaning long-vol books benefit asymmetrically from vol spikes versus vol declines. ```mermaid graph LR A[Vol change] --> B[Linear
Vega] A --> C[Curvature
Volga] B --> D[P&L est.] C --> D ```

How is volga different from vega and when does it dominate P&L?

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