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Education / Track II · The Greeks / L.08

Vega: Pricing the Surface

Vega is the Greek that connects every option to the broader volatility market. When VIX moves, vega is the channel through which it moves your portfolio.

14 min read · Lesson 8 of 24

What vega measures

Vega is the change in an option's price for a one percentage point change in implied volatility. If a call has a vega of 0.20 and IV rises from 25% to 26%, the call's price will rise by approximately $0.20.

Vega is positive for both long calls and long puts. Long any option means long vega. Short any option means short vega. There is no "vega-bullish call" and "vega-bearish put" the way delta has direction. Vega just measures sensitivity to the implied volatility number, which is the market's expectation of how much the underlying will move going forward.

Vega depends on time and moneyness

Like the other Greeks, vega is not constant. It is highest at the money and decays as you move away. It is also higher for longer-dated options, because more time means more uncertainty, which means more sensitivity to the IV input.

$70 $85 $100 $115 $130 0 0.10 0.20 0.30 Underlying Price Vega 30d 90d 180d Vega vs Underlying Price · Strike $100 · IV 25%
Fig. 08.1 Vega across strikes at three different expiries. Longer-dated options have substantially more vega. Vega peaks at the money for every expiry.

A 180-day ATM option has roughly four times the vega of a 30-day ATM option on the same underlying. This is why long-dated options are the standard vehicle for expressing pure volatility views. They give you the most vega per dollar spent.

Vega is the link to the broader vol market

Implied volatility is set by the market, the same way prices are. Supply and demand for options moves IV up and down independently of the spot price. When buying interest dominates (often during market stress), IV rises. When selling interest dominates (often during calm periods), IV falls.

If you are long vega, you make money when IV rises. If you are short vega, you make money when IV falls. This is structurally separate from delta. You can have a delta-neutral position that swings dramatically based on IV alone.

Vega vs gamma
Both are volatility exposures. Gamma cares about realized volatility (what the stock actually does). Vega cares about implied volatility (what the market expects). They often move together but they can also diverge: IV can drop while realized stays elevated, or IV can spike while realized stays calm. The two are not the same thing.

How vega shows up in practice

Suppose you sell a 60-day SPY straddle for $15 of premium. Your initial delta is roughly zero. Your gamma is moderate. Your theta is positive. Your vega is highly negative. If IV rises overnight from 14% to 17%, your straddle might mark to $18 or $19 even if SPY has not moved a penny. You are losing money on a position whose underlying is unchanged.

This is the most common surprise for new short-premium traders. They look at the price action in the underlying, see no movement, and assume their position should be profitable from theta. But IV expanded, and their large vega exposure overwhelmed the small theta gain.

VIX as the vega benchmark

VIX measures the 30-day implied volatility of SPX options. A VIX move from 14 to 17 is a 3-point increase, which represents a 3 percentage point increase in 30-day SPX IV. If you are short SPX options worth $1,000 of total vega, that move costs you roughly $3,000.

Index option traders often quote their book in "VIX equivalent vega" because it makes the dollar consequences of a VIX move legible. Lesson L.14 covers the VIX complex in detail.

Term-structure vega and skew vega

As you go deeper into options trading, you discover that there is not one IV but a whole surface. Different strikes have different IVs (skew). Different expiries have different IVs (term structure). A complex options book has different vega exposures across this surface, and different parts can move independently.

A trader can be long vega in 30-day options and short vega in 90-day options. If the term structure flattens, both legs can lose money simultaneously. Skew vega and term-structure vega are real risks for any non-trivial book. Lessons L.12 and L.13 develop these in detail.

How traders think about vega

Professional vol traders think about vega in dollar terms, not contract terms. "I am short $5,000 of vega in March SPX" means a 1-point IV change in March SPX is worth $5,000 of P&L. This is the only way to compare positions across different strikes, expiries, and underlyings.

Most retail platforms show vega per contract. To convert to dollar vega, multiply by the contract multiplier (100 for equity options) and the position size.

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