How a dealer’s delta changes when volatility moves, the reason a falling VIX can lift a market on no news.
Vanna is how much an option’s delta changes when implied volatility changes. Gamma answers "how does my hedge change when price moves"; vanna answers "how does my hedge change when volatility moves, even if price does not".
Dealers are typically short puts to the market. When implied volatility falls, the delta of those puts falls too, which leaves the dealer over-hedged, short more underlying than the position now requires. Closing that gap means buying. No news, no flow, no view: a mechanical bid produced by volatility declining.
The classic case is the session after an event passes without incident. The event premium comes out of implied volatility, vanna converts that into dealer buying, and a market drifts up on a day with no headline to explain it. The same mechanism runs in reverse when volatility spikes.
Most gamma exposure tools stop at gamma. Vanna needs implied volatility per contract and a second derivative on top of it, so it is more work to compute and easier to leave out, which is also why a book can look calm on a gamma chart and be carrying a large volatility-driven hedge underneath.
Vanna is the rate at which an option’s delta changes when implied volatility changes. Gamma answers how a hedge must change when price moves; vanna answers how it must change when volatility moves, even if price does not move at all.
Dealers are typically short puts to the market. As implied volatility falls, the delta of those short puts shrinks, which leaves the dealer short the underlying against a hedge sized for a larger delta. Buying back that difference is mechanical. It is why a quiet grind higher on no news is often not on no news — the news was the volatility.
Neither dominates in general. Gamma matters most when price is moving and expiry is near; vanna matters most when implied volatility is moving and open interest sits further out in time. The sessions that surprise people are usually the ones where both point the same way.
Dealer gamma across the expiry curve, and a written read every session.
CREATE A FREE ACCOUNT, NO CARD