Financial Glossary
Vega
Volatility sensitivity: how much option prices change when implied volatility shifts.
What is Vega?
Vega measures how much an option's price changes for each one-percentage-point change in implied volatility. An option with vega of 0.10 gains $0.10 when implied volatility rises 1% (say, from 20% to 21%), assuming the stock price doesn't change. Vega is positive for long calls and long puts (you profit from rising IV) and negative for short options (you profit from falling IV).
Vega is highest for at-the-money options and long-dated options. A far-out-of-the-money option or one close to expiration has low vega. This is counterintuitive to many traders: an out-of-the-money call benefits less from IV spikes because it has less time and lower probability of finishing profitable anyway.
Why Vega Matters
Vega determines how options react to volatility changes independent of directional moves. During earnings announcements or market turmoil, IV spikes, and vega becomes the dominant driver of option P&L—often overwhelming the effect of the stock moving. A trader who buys a call before earnings might profit even if the stock doesn't move, purely because implied volatility jumped.
Conversely, option sellers benefit from IV drops. If you short a call and implied volatility collapses after earnings, you profit from the IV crush even if the stock rose. This is why selling premium before high-IV events (earnings, economic data) can be attractive—you collect the IV premium and sell into elevated levels.
Disclaimer: Vega changes as IV changes, so vega itself is not constant. Very large IV moves can cause vega exposure to shift unexpectedly. Before trading options, consult a qualified financial advisor. Options involve substantial risk, including volatility-driven losses.