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In the context of options, zomma is a measurement of the change in gamma in relation to changes in the volatility of the underlying asset.
Zomma and gamma are both greeks, i.e. quantities representing the sensitivity of the price of derivatives to a change in underlying parameters on which the value of the instrument depends. They are called greeks since most of them are denoted by Greek letters.
Zomma is considered a third-level greek. Options traders chiefly use zomma when monitoring the effectiveness of gamma-hedged investment portfolios.
The degree to which the gamma of an options contract is sensitive to variations in implied volatility is measured by Zomma, a third-order risk measure. “D-gamma/D-vol” is another name for it. The sensitivity of an option’s delta to changes in the underlying price is measured by gamma, which is a second-order risk measure.
Zomma is a type of measurement that is used to examine a derivative’s price sensitivity to various factors such as interest rate changes, volatility, or the spot price of the derivative’s underlying asset. Because these dimensions are signified by Greek symbols, they are usually referred to as “Greeks.” However, the word “zomma” was coined by traders to sound like a Greek letter and is not part of the Greek alphabet.
For people who are unfamiliar with derivatives jargon, understanding zomma can be challenging. This is due to the fact that zomma can only be described in terms of two abstract concepts: gamma and delta. In order to comprehend the “real world” meaning of zomma, you must also comprehend gamma and delta.
To begin, we can state that zomma is a third-order derivative. This means that zomma is used to calculate the change in a second-order derivative, notably gamma. The sensitivity of delta to changes in the price of the underlying asset is measured by gamma. Finally, delta assesses the sensitivity of the underlying asset to changes in the derivative product.
To measure the efficacy of a gamma hedged portfolio, derivative traders and portfolio managers frequently employ zomma. In this case, zomma would track swings in the portfolio’s volatility and/or underlying assets.
Gamma hedging is a hedging approach that is used in conjunction with options or other derivatives. In essence, the delta hedging technique seeks to hedge against the risk of the derivative’s price becoming disconnected from the price of its underlying asset. In this sense, Zomma is an essential metric.
Risk profiles in derivative portfolios can be very dynamic. For example, the risk might change depending on considerations including underlying asset price swings, interest rate changes, and implied volatility adjustments.
Derivative traders use a variety of metrics to keep track of this continuously shifting risk profile. Delta, for example, is a calculation of how much profit or loss will be made if the values of the underlying assets rise or fall. Even this seemingly simple concept, however, is more complicated than it appears. This is due to the fact that the relationship between delta and the price changes of the underlying asset is not linear. This results in a second metric, gamma, which gauges delta’s sensitivity to price changes. Delta is a first-order measurement, whereas gamma is a second-order measurement in this sense.
Finally, the rate of change of gamma in respect to changes in implied volatility is measured by Zomma. For example, if zomma = 1.00 for an options position, a 1% increase in volatility will increase the gamma by 1 unit, causing the delta to increase by the amount given by the new gamma. If the zomma is strong (positive or negative) in absolute terms, it means that tiny changes in volatility can lead to huge changes in directional risk when the underlying price moves.
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This glossary post was last updated: 6th January, 2022 | 0 Views.