What it means
Vanna is the second-order Greek measuring how much an option's DELTA changes when IMPLIED VOLATILITY changes. Specifically: ∂Δ/∂σ (partial derivative of delta with respect to volatility). Why it matters for dealers: when IV moves, option deltas change EVEN IF SPOT DOESN'T. Dealers must rebalance delta hedges to account for vol changes. Negative vanna (typical of calls) means delta rises as IV rises — dealers short calls (negative vanna position) must BUY underlying as IV rises. Positive vanna (puts) means delta becomes more negative as IV rises — dealers short puts must SELL underlying as IV rises.
Why it matters
Vanna explains the 'vol-spot correlation' phenomenon in equity markets. When VIX rises (typically alongside SPX falling), dealer vanna hedging adds incremental selling pressure on SPX, accelerating the decline. The 'vanna effect' on selloffs is a major reason equity declines often gap into self-reinforcing patterns rather than orderly drawdowns. Vanna is the more sophisticated cousin of gamma — same hedging-flow logic, second-derivative.
How to use it
Track vanna alongside gamma exposure. Vanna-driven flows are typically slower than gamma flows (vol changes are slower than spot changes) but can sustain over multi-day periods. The largest dealer vanna positions are typically in long-dated puts (high investor demand for protection). Spike events that move vol AND spot in the same direction (typical of crashes) produce maximum vanna-driven flow.
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