Glossary · from the DESK dictionary
Vega
Measures how much an option's price changes for a 1-percentage-point change in implied volatility.
In plain words
Vega shows how sensitive an option is to changes in the underlying's expected (implied) range of movement.
In more detail
Vega measures how strongly an option's price reacts to a one percentage point change in implied volatility. It is largest for at-the-money options and long maturities. In practice separating directional from volatility views is decisive: you can be right on the price forecast and still lose if implied volatility collapses after the expected event and vega works against the position.
Formula
ν = ∂V/∂σ
The partial derivative of the option price with respect to implied volatility σ.
Example
A trader buys calls ahead of earnings. The stock rises 4 percent as expected, but implied volatility falls from 62 to 31 — at a vega of 0.09 that costs him 2.79 euros, more than the price gain.
What it means for traders
Central to pure volatility strategies like straddles, which bet on changes in IV rather than price direction.
Common pitfalls
Long-vega positions can lose money despite a correct directional call, due to falling IV (volatility crush).
Related terms
Implied Volatility (IV) · Ultima · Vanna · Vega-Neutral Portfolio · Volatility Crush · Volatility of Volatility · Volga (Vomma) · Zeta (ζ) · Zomma
From the DESK dictionary. For information only, not investment advice.
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