Volatility Gamma

Volatility Gamma, also referred to as Vanna in options risk management, measures the rate of change of an option's Delta with respect to changes in implied volatility — or equivalently, the rate of change of Vega with respect to changes in the underlying asset price. It is a second-order Greek that quantifies how a position's delta sensitivity evolves as implied volatility shifts. A positive volatility gamma means that as implied volatility rises, the delta of the position increases — amplifying the directional exposure. For options market makers and institutional desks trading Nifty 50 and Bank Nifty options in India, managing volatility gamma is critical during periods of sharp volatility spikes — such as during RBI policy surprises, election results, or global risk-off events — because failing to account for it can cause significant P&L swings in delta-hedged portfolios. Volatility gamma exposure becomes particularly large for near-the-money options as expiry approaches and implied volatility changes rapidly.