Options Vega or the volatility value of options is a measure of how sensitive an option is to changes in Implied Volatility. Put simply, Implied Volatility and Vega move in the same direction, in the rate of “Vega” US$ for each IV point, i.e.:
- An option that has a Vega of 106 will gain 106 dollars every time implied volatility goes up one point (all other things being equal)
- Conversely, an option with Vega of -106 will lose 106 dollars every time the implied volatility goes down one point.
NB: A refresher on IV i.e. on pricing models like Black & Scholes may be needed to better understand Vega.
Long or Short Vega ?
- If you are long an option, you are Long Vega,
- if you are short an option you are Short Vega
- ATM options will have the highest Vega
- ITM and OTM options will have lower Vega
- Generally the further ITM or OTM the option is, the less Vega it will have
Vega and Time
- The longer the time to Expiration, the more Vega the option will have.
In this above example, we can see similar IV across the next three monthly maturities and how Vega on the other hand increases with time.
Vega and options strategies
- The P&L of options Vega Positive positions is helped by increasing volatility in the market (i.e. VIX goes higher), and are hurt by decreasing volatility. Examples of Vega Positive positions are:
- The P&L of options Vega Negative positions is helped by decreasing volatility in the market (i.e. VIX goes lower), and are hurt by increasing volatility. Examples of Vega Negative positions are:
- Low and High Probability Condors
Calendars vs. Condors : Quite a few beginners get fooled by the apparent similarity of equity curves at T+0 to T+8 (obviously not at expiration). They ignore or neglect the sensitivity to IV.
Note that Options Masters specialises in net selling combinations that therefore are overall options Vega Negative positions.
Timing for Vega
As net sellers of options, IV thus options vega tends to increase on a down move, i.e. we shall always try and find a “vol pop” to capture Vega at the time of entry. Again it is not recommended to leg out and enter parts of the overall position. One could indeed be tempted to sell put credit spreads and wait for a bounce to complete the position with calls. However IV will come down also on an up move. That kind of tweaking should be left to the more advanced trader.
Other more exotic Greeks ?
Yes, there are other lesser known Greeks, like Vanna, Volga and maybe more… They are quite theoretical and quite frankly, only amuse academics… Please read this text for more details.