Vega

Vega measures how much an option price is expected to change when implied volatility moves by one percentage point. It reflects sensitivity to changes in market expectations of future price swings.

What is vega?

Vega is the partial derivative of the option price with respect to implied volatility. Long options have positive vega — higher implied volatility raises premiums, and lower volatility reduces them. Short options have negative vega. Vega is largest for at-the-money options with more time to expiration because they contain the most extrinsic value. Vega does not affect intrinsic value—only the time-value portion of the premium.

How to measure vega

Vega is reported as the expected dollar change in premium per one-point change in implied volatility (for example, from 20% to 21%). A vega of 0.15 on a contract with a 100-share multiplier implies about $15.00 premium change per volatility point. Portfolio vega is the sum across all legs. Because each strike and expiration has its own implied volatility, vega is an approximation that assumes parallel shifts in the volatility surface unless the platform models skew explicitly.

How vega changes

Vega is highest for at-the-money options with several weeks to months until expiration. It declines as expiration approaches because there is less time value left to reprice. Deep in-the-money and far out-of-the-money options carry lower vega. After major events such as earnings, implied volatility often collapses—a phenomenon called volatility crush—which hits long vega positions hardest. Calendar and diagonal spreads can isolate or hedge vega exposure across expirations.

How option prices change when vega changes

When vega is high, a rise in implied volatility increases option premiums even without a stock move; a drop in volatility erodes premium. When vega is low, volatility shifts have little effect. For example, a long straddle with high vega gains value when fear rises and loses value when volatility falls after an event. Short premium strategies with negative vega profit from declining volatility but suffer when uncertainty expands. Traders align vega exposure with their view on whether implied volatility is rich or cheap relative to realized movement.