Vega
Vega measures how much an option’s price changes for a 1% change in implied volatility (IV). It tells you how sensitive your position is to “fear” or “complacency” in the market.
Why vega matters
- Before events (Budget, RBI policy, global data), IV often rises → vega helps long options.
- After events, IV often collapses → vega hurts long options, helps short options.
- Even if your directional view is right, a big IV drop can reduce profits or cause losses.
Simple example
A NIFTY 23450 CE has vega = 12.0 (per unit).
If IV increases by 5%, the option price might increase by roughly:
12.0 × 5 = ₹60 (per unit). For 1 lot (25 units), that’s ₹1,500.
If IV increases by 5%, the option price might increase by roughly:
12.0 × 5 = ₹60 (per unit). For 1 lot (25 units), that’s ₹1,500.
Typical vega behavior
- ATM and near-ATM options have higher vega.
- Longer-dated options have higher vega (more time for IV to matter).
- Very near expiry, vega drops; theta and gamma dominate.
Using vega in your trading
- Long vega (long options): benefits from IV rising; suffers from IV crush.
- Short vega (short options): benefits from IV falling; suffers from IV spikes.
- Consider entering long options when IV is relatively low, and short options when IV is relatively high.
Next: Learn how IV and OI together shape the option chain in the IV & OI Basics article.