Vega Positioning

Vega positioning means building an option position mainly to express a view on implied volatility rather than on price direction. A trader who expects implied volatility to rise, perhaps because a market looks complacent before major risks, takes a long vega position. One who expects it to fall, perhaps after a panic has peaked, takes a short vega position. The position is usually delta hedged so that price direction matters less.

Long vs short vega#

Long vega positions often lose time value while waiting for volatility to rise. Short vega positions collect time value but face losses if volatility spikes. See Theta.

Judging whether volatility is cheap or rich#

Traders compare implied volatility with:

• Its own history: IV rank and percentile show where current levels sit within the past year. See IV Rank and IV Percentile.
• Realised volatility: if implied is well above what the market is actually doing, options may be expensive. See Historical and Realized Volatility.
• Upcoming events: volatility usually rises into earnings, central bank meetings and elections, then falls afterwards. See Volatility Crush and Expansion.
• Other markets and expiries: relative value between related volatilities.

Term structure and vega#

Implied volatility differs across expiries. Usually longer dated volatility is higher than short dated (upward sloping term structure); in stress, short dated volatility jumps above long dated (inverted). See Volatility Term Structure.

• Short dated options have small vega but their implied volatility moves a lot.
• Long dated options have large vega but their implied volatility moves less.

Calendar spreads, which sell near term options and buy longer term ones, are long vega overall but also bet on the shape of the term structure. See Calendar Spreads and Term Structure Trading.

Vega across strikes#

Out of the money puts on equity indices carry higher implied volatility than at the money options (skew). A position can be long vega at one strike and short at another, profiting from changes in the shape of the smile. See Skew Trading and Volatility Smile and Skew.

Sizing vega positions#

• Size by the vega loss you can accept if volatility moves against you by a realistic amount, such as 5 to 10 points for an index.
• Weight vega by expiry when combining positions, because short dated volatility tends to move more.
• Remember gap and gamma risk on short vega trades.

See Position Sizing and Managing Portfolio Greeks.

Purer volatility exposure#

Options mix vega with gamma, theta and delta. Professionals seeking purer exposure use variance swaps, volatility swaps or VIX futures and options. See Variance and Volatility Swaps and The VIX.

Common mistakes#

• Buying volatility because it is "low" without a reason for it to rise; it can stay low for a long time.
• Selling volatility because it is "high" just before it goes higher.
• Ignoring theta on long vega positions.
• Treating all expiries' vega as equal.

Frequently asked questions#

What is vega positioning?#

Building option positions to profit from changes in implied volatility, usually while hedging price direction.

How do you trade rising volatility?#

With long vega positions such as long straddles, long strangles or calendar spreads, ideally when implied volatility is low relative to its history.

What is the risk of short vega positions?#

A spike in implied volatility, often during market selloffs, can cause rapid losses, especially combined with short gamma.

Next, learn to manage all the Greeks across a book in Managing Portfolio Greeks.