Options Greeks Vomma
I don’t know about you, but I am wondering when the next big market crash is going to happen. I’m always wondering about this. Why? Because there are ways to make huge profits from them if you know how to use higher order Greeks. While most option traders are running for cover (literally, ha ha, option joke, get it?), there are ways to be on the winning side of the crash using the options Greeks, especially Vomma. There are many ways to do this, but I’ll discuss one of them now.
Back Ratio Spreads and the Options Greeks – Vomma
The Back Ratio is a very interesting trade that can bring you huge profits over a market crash. While other option traders will be covering their naked positions, credit spreads, or buying puts to protect whatever positions they have on, the Back Spreader is counting how much money his/her account is profiting, but the Back Ratio Spread is not so easy.
The Back Spread has a negative Theta position, so one has to be a master of this trade to use it a lot. If you do not understand its Greeks deeply enough, you might find yourself losing trade after trade while waiting for that big crash to happen. There is also a big hole that can develop in the trade’s risk profile, so be very careful if you trade it.
Know Your Option Greeks, Especially Vomma
A good quality of the trade is the positive Vomma. This means that the Vega position will rise as IV rises and that is how this trade can make some handsome returns over a market debacle. Option trading is all about volatility and the more you understand it, the better trader you become.
So that is your first lesson about Vomma. More likely than not, over 99% of option traders do not understand how to implement this second order Greek, so you are now one of the smartest option traders on the block! (note, in the software by SJ Options, you can model your Vomma and other second order Greeks).
Even though we are just touching the surface of the Back Ratio Spread, we hope you’ve enjoyed this short lesson on the options Greek known as Vomma. Next time we face a market catastrophe, be wise and make a small fortune from it.