Can someone explain the "vanna decay" story? I am looking for something at least somewhat logically consistent (not even asking for a model cause I gave up on that).
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I don’t think anyone claims that the dynamic is the primary cause of moves in the underlying, rather than the hedging either suppresses or exacerbates moves that happen for some other reason.
Possibly you are asking about something else since you used the phrase “vanna decay” which I am not familiar with?
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People refer to this stuff as “gamma hedging” or “vanna hedging” which is very unhelpful, since no gamma or vanna exposure is being hedged. It’s just sensitivities of delta to moves in spot or implied volatility.
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Ok, thanks, not exactly my question but to your point: can you walk me through a "verbal" impulse response functions and tell me some identifying assumption to belive the vanna hedging *causes* prices to go down. Suppose we start from an equilibrium. What is the causality story?
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