What is Vega?
Vega is an options Greek that measures an option's sensitivity to changes in implied volatility. It represents how much the option's price will change for a 1 percentage point move in implied volatility. Unlike the other major Greeks, vega is not actually a Greek letter, but it is grouped with them by convention.
Understanding Vega Values
If an option has a vega of 10, a 1% increase in implied volatility, for example from 50% to 51%, will increase the option's price by $10. Conversely, a 1% decrease in implied volatility will reduce the price by $10.
Vega is positive for long options, both calls and puts, because higher volatility increases option value. Short options have negative vega, meaning rising volatility hurts the position.
Vega and Time to Expiration
Longer-dated options have higher vega than shorter-dated options. More time means more opportunity for volatility to affect outcomes, making these options more sensitive to implied volatility changes.
Vega and Moneyness
At-the-money options have the highest vega. Deep in-the-money and far out-of-the-money options have lower vega because they are less sensitive to volatility changes.
Trading Volatility with Vega
Traders who expect implied volatility to increase, such as before a major announcement, can buy options to benefit from vega. Those expecting volatility to decrease after an event passes can sell options.
Vega Risk
For option sellers, vega risk is significant. A sudden spike in implied volatility can cause substantial mark-to-market losses on short options positions, even if the underlying price has not moved. This is particularly relevant in crypto markets where implied volatility can spike dramatically during market stress.