Stock Option Greeks: Vega Explained

Vega measures the risk of changes in implied volatility or the forward-looking expected volatility of the underlying asset price. While delta measures actual price changes, vega is focused on changes in expectations for future volatility.

Higher volatility makes options more expensive since there’s a greater likelihood of hitting the strike price at some point.

Vega tells us approximately how much an option price will increase or decrease given an increase or decrease in the level of implied volatility.7

Option sellers benefit from a fall in implied volatility, but it is just the reverse for option buyers.

It’s important to remember that implied volatility reflects price action in the options market. When option prices are bid up because there are more buyers, implied volatility will increase.

Long option traders benefit from pricing being bid up, and short option traders benefit from prices being bid down. This is why long options have a positive vega, and short options have a negative vega.

Additional points to keep in mind regarding vega:

  1. Vega can increase or decrease without price changes of the underlying asset, due to changes in implied volatility.
  2. Vega can increase in reaction to quick moves in the underlying asset.
  3. Vega falls as the option gets closer to expiration.

Image Source: CME Group