Zomma

Zomma (also called DgammaDvol) measures how gamma changes when implied volatility changes. It captures the cross-sensitivity between gamma and IV — telling you whether your gamma exposure will increase or decrease as volatility shifts. If an option has a zomma of 0.002, a 1-point increase in IV will increase gamma by approximately 0.002.

Why It Matters

Zomma explains a phenomenon that trips up many gamma traders: why the gamma on their options changes after a volatility event even though the stock price and time to expiration have not changed meaningfully. If you entered a position expecting a certain gamma profile, a sudden change in IV can reshape that profile through zomma.

This Greek is particularly relevant around earnings announcements, Fed meetings, and other events where IV shifts substantially in a short period. Traders who buy straddles for gamma might find their gamma profile altered by the concurrent IV change. Market makers use zomma to understand how their entire gamma surface shifts when the volatility environment changes.

How It Works

Zomma is the derivative of gamma with respect to IV, or equivalently, the derivative of vanna with respect to the stock price. It links the gamma surface to the volatility environment.

How zomma behaves:

• ATM options with high IV: When IV increases, ATM gamma decreases. Higher IV spreads the probability distribution wider, flattening the gamma peak at the money. Zomma is negative for ATM options.
• ATM options with low IV: Conversely, low IV concentrates the gamma peak, making ATM gamma very high. A drop in IV increases ATM gamma.
• OTM options: When IV increases, OTM options gain gamma because higher IV makes it more likely the stock reaches those strikes. Zomma is positive for OTM options.

The intuition: Think of gamma as a bell curve centered at the strike price. When IV is low, the bell curve is tall and narrow — high gamma at the money, almost none elsewhere. When IV is high, the bell curve is short and wide — moderate gamma spread across many strikes.

Zomma in practice:

• If you buy ATM straddles and IV then rises, zomma tells you your gamma has decreased. You need larger stock moves to generate the same gamma-driven profits.
• If you sell far OTM options and IV rises, zomma tells you those options now have more gamma than before, increasing your gamma risk.
• After IV crush (such as post-earnings), your ATM options have increased gamma — the gamma concentrates as IV contracts.

Quick Example

You buy an ATM straddle on stock UVW at $100 with gamma of 0.04 and zomma of -0.003. Current IV is 30%. Ahead of earnings, IV rises from 30% to 50% — a 20-point increase.

Zomma effect: gamma changes by -0.003 x 20 = -0.06. New gamma is approximately 0.04 - 0.06 = -0.02... but gamma cannot be negative for a long option, so the linear estimate breaks down. In practice, the gamma drops significantly — perhaps from 0.04 to 0.02. Your straddle now needs larger stock moves to generate the same profits.

After earnings, IV crashes from 50% to 25% (a 25-point drop). Zomma works in reverse: gamma increases. Your surviving straddle position, if still near ATM, has higher gamma than before the IV crush — partially offsetting the vega loss from the IV drop.