Which of the following statements about Volga is most accurate?
A. Volga is the rate at which vega changes with respect to the underlying price
B. High Volga values imply that options are more sensitive to kurtosis risk of the underlying asset
C. Volga becomes particularly important when trading binary options due to their vega profile
D. All else being equal, an option with a longer time to maturity will always have a higher Volga than an option with a shorter time to maturity
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B. High Volga values imply that options are more sensitive to kurtosis risk of the underlying asset (fat tails).
Explanation:
Volga, also known as "Vomma", is the rate at which vega changes with respect to changes in the volatility of the underlying asset, not its price. Therefore, option A is incorrect.
High values of Volga indicate that the option's vega is sensitive to changes in implied volatility, which in turn can be influenced by the kurtosis (or the tails) of the underlying's
returns distribution. Hence, option B is accurate.
While Volga does impact options with pronounced vega profiles, it's not specifically tied to binary options as indicated in option C.
Option D is a general statement and can be misleading. While time to maturity can affect various Greeks, it's not accurate to say that longer-dated options will "always" have a higher
Volga than shorter-dated options.
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