Vega

The sensitivity of an option's price to a one-percentage-point change in implied volatility — the measure of volatility risk in an options position.

Vega measures how much an option's price changes for a 1% change in implied volatility. An option with vega of 0.15 will gain $0.15 in value (per share, or $15 per contract) for every 1 percentage point increase in IV, and lose $0.15 for every 1% decline. Options with more time remaining have higher vega because implied volatility has more time to affect the potential outcome.

Vega is the key risk for anyone who buys options before binary events like earnings announcements. When IV spikes going into earnings (uncertainty premium), it inflates option prices. After the earnings are released and uncertainty is resolved, IV collapses — even if the stock moves in the right direction, the IV crush can eliminate or reverse the delta gains. This is the "IV crush" phenomenon that surprises many first-time options buyers.

Conversely, selling options when IV is high and vega is large is the strategy for capturing the IV crush. If you sell a straddle before earnings when IV is at 80%, you benefit from vega as IV falls back to 25% afterward. Managing vega exposure — being long or short volatility intentionally as part of a view — is a central skill of sophisticated options traders and volatility managers at hedge funds.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.