Vega

Vega measures how much an option's price changes when implied volatility changes by one percentage point. If a call has a vega of 0.15, a rise in implied volatility from 25% to 26% adds about $0.15 to its price, or $15 per contract. Vega matters because implied volatility can move a lot, especially around earnings and market stress, and those moves can make or lose money on an option position even when the underlying price stays still.

Vega basics#

Calls and puts at the same strike and expiry have the same vega.

Vega and time to expiry#

Unlike gamma and theta, which grow as expiration nears, vega grows with time to expiry. A one year option is far more sensitive to volatility changes than a one week option. For at the money options, vega is roughly proportional to the square root of time.

These figures follow from the approximation that an at the money option's vega per share is about 0.4 × price × √(time in years) divided by 100.

Volatility crush#

Implied volatility often rises before scheduled events such as earnings and falls sharply afterwards. Option buyers can be right on direction and still lose because the drop in volatility, multiplied by vega, outweighs the gain from the move.

Vega and strike#

Vega is largest at the money and smaller for strikes far from the current price. Because implied volatility differs across strikes, a phenomenon known as skew, the vega exposure of a multi strike position depends on how the whole volatility curve moves, not just one number. See Volatility Smile and Skew and Volatility Surface.

Using vega#

Volatility traders manage vega as their main exposure, often hedging delta. See Vega Positioning and Volatility Trading.

Vega in portfolios#

Vega adds across positions, but options of different expiries do not move in step: short dated implied volatility usually moves more than long dated. Many traders weight vega by expiry to reflect this. See Volatility Term Structure and Managing Portfolio Greeks.

Common mistakes#

• Buying options before events without accounting for volatility crush.
• Ignoring vega on long dated options, which can swing a lot with volatility.
• Treating all vega as equal across expiries.

Frequently asked questions#

What is vega in options?#

The change in an option's price for a one percentage point change in implied volatility.

Why do my options lose value after earnings even if the stock moves my way?#

Implied volatility usually falls sharply after earnings. The drop, multiplied by vega, can outweigh the gain from the price move.

Which options have the highest vega?#

At the money options with a long time to expiration.

Next, learn the smallest of the main Greeks, Rho.