Vega

Vega measures an option’s sensitivity to implied volatility. It is the amount by which the premium changes when implied volatility moves by one point. Long options are long vega and short options are short vega, whether calls or puts.

How it works

vega = change in option price for a 1-point move in implied volatility. Vega is highest for at-the-money options and grows with maturity, roughly in proportion to the square root of time. A one-year option carries much more vega than a one-week option on the same strike. This is the mirror image of gamma, which concentrates on short maturities. Vega is not constant either: it changes with spot (vanna) and with volatility itself (volga). A book that is flat vega in aggregate can still carry large risk if long and short vega sit on different expiries or strikes.

Example

Hypothetical: an option is worth $5.00 with a vega of 0.20. If implied volatility rises from 20% to 23%, the option is worth about 5.00 + 3 × 0.20 = $5.60, all else equal. On 50 contracts with a multiplier of 100, the gain is 50 × 100 × 0.60 = $3,000.

On the desk

Desks rarely add raw vega across maturities, because short-dated volatility moves much more than long-dated volatility. They weight vega by maturity, often with a square-root-of-time rule, or bucket it by expiry so that a term structure move does not hide behind a flat total.