Vega
How much an option's price changes when implied volatility moves.
Vega measures how much an option's price changes for every 1 percentage point change in implied volatility. A vega of 0.10 means the option gains $0.10 per share if IV rises by 1% and loses $0.10 per share if IV falls by 1%. Despite being called a "Greek," vega is not actually a Greek letter — it is a name adopted by the options market.
Why It Matters
Volatility is arguably the most important factor in options pricing after the stock price itself. You can be right about the direction of a stock and still lose money if implied volatility drops (this is called "IV crush"). Vega quantifies this risk.
Understanding vega is especially critical around events like earnings announcements, where IV is inflated beforehand and collapses afterward. Traders who buy options before earnings and hold through the announcement often discover that the IV drop wipes out their directional gains. Vega is what measures that exposure.
How It Works
Vega has several key properties:
Vega and time: Longer-dated options have higher vega. A LEAPS option is far more sensitive to IV changes than a weekly option. This makes sense — volatility has more time to affect the outcome over a longer period.
Vega and moneyness: ATM options have the highest vega. Deep ITM and deep OTM options have lower vega because their prices are dominated by intrinsic value (ITM) or are already very cheap (OTM).
Long vs. short vega:
- Buying options gives you positive vega — you benefit when IV rises
- Selling options gives you negative vega — you benefit when IV falls
- This is why option sellers often prefer high-IV environments: they sell expensive options and profit as IV normalizes
IV crush and vega: Before earnings, IV on a stock might be 60%. After the announcement, it could drop to 30%. If your option has a vega of 0.15, that 30-point IV drop costs you $4.50 per share ($450 per contract). Even if the stock moved in your direction, the IV crush might have erased your profit.
Vega across strategies:
- Long straddles/strangles = high positive vega (betting on volatility expansion)
- Iron condors/credit spreads = negative vega (betting on volatility contraction)
- Calendar spreads = positive vega (benefiting from the back month's higher vega)
Quick Example
You buy an ATM call with 45 days to expiration. The call costs $4.00, with IV at 35% and vega of 0.12. IV rises from 35% to 40% (a 5-point increase). Your option gains 5 x $0.12 = $0.60 per share, pushing the price to $4.60 — without the stock moving at all.
Conversely, if IV drops from 35% to 28% (a 7-point decrease), your option loses 7 x $0.12 = $0.84 per share. The option falls to $3.16 even if the stock is exactly where you bought it.