Options | Derivatives
Vega (Options)
"Vega measures the sensitivity of an option's price to a 1% change in implied volatility. It is the volatility greek."
In-Depth Definition
Vega quantifies the impact of a change in implied volatility (IV) on an option's price. A Vega of 0.20 means the option gains $0.20 if IV increases by 1 percentage point, and loses $0.20 if IV falls by 1%. Option buyers have positive Vega (they benefit from rising volatility); sellers have negative Vega. Long-dated ATM options have the highest Vega. Vega is central to managing IV Crush: after a binary event (earnings, NFP), IV collapses, and purchased options lose massively in value even if the direction was correct. Vega-long strategies (straddles, strangles) profit from volatility expansion; Vega-short strategies (iron condors, credit spreads) profit from contraction.
StarQuant Insight
StarQuant's Options Desk displays the portfolio's total Vega and compares it to the current IV Rank to advise on optimal Vega positioning: long vol if IV is low, short vol if IV is high.
Pro Tip
Never trade an option without looking at its Vega in the context of IV Rank. Buying a call with high Vega when IV is at its historical maximum means buying an expensive option that may lose value even if the underlying rises.