What is vega in options?
In one line: Vega is how much an option's price is expected to change when its implied volatility rises or falls by 1 percentage point.
A simple example
A Call option costs $3.00. Its vega is 0.10. Its Implied volatility (IV) is 30%.
- IV rises to 35%. That's 5 points × $0.10 = +$0.50. The option is now about $3.50.
- IV falls to 25%. The option drops to about $2.50.
This can happen even if the stock price doesn't move at all. Per contract of 100 shares, each $0.10 is $10.
Where vega is biggest
- Longer-dated options: more time means more room for surprises, so IV matters more.
- Near the money: strikes close to the stock price usually have the most vega.
- Short-dated, far out of the money: vega is small.
Why it matters
Option prices aren't only about direction. They also price how big moves are expected to be.
The classic case is earnings. Before a report, IV often rises because a big move is possible. Right after, IV often drops sharply. That's called IV crush.
| Before earnings | After earnings |
|---|---|
| IV 60%, call $5.00 | IV 35%, stock up a little, call $3.80 |
Illustrative numbers. The stock went the "right" way, and the call still lost value, because IV fell.
Model it in the options profit calculator, and see options trading basics for the foundations.
A common mistake
Buying options right before big news without checking IV. If IV is already high, a lot of the expected move is in the price. The stock may need a very big move just to break even.
The VIX is a kind of IV for the whole S&P 500. When it's high, options on most stocks tend to cost more too.
Questions
Is vega positive or negative?
For buyers of calls and puts, vega is positive: higher IV helps. For sellers, it's negative.
Why isn't vega a Greek letter?
It isn't one. The name stuck anyway, alongside delta, gamma and theta.
What causes implied volatility to change?
Supply and demand for options. Upcoming news, market stress and big recent moves tend to push IV up.
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