[lwp_divi_breadcrumbs font_icon=”5||divi||400″ use_custom_home_link=”off” link_color=”#000000″ separator_color=”#000000″ current_text_color=”#FFFFFF” admin_label=”Breadcrumbs” module_class=”insight-breadcrumbs” _builder_version=”4.27.0″ _module_preset=”default” global_colors_info=”{}”][/lwp_divi_breadcrumbs]

Market Insights

Bringing you the trading news around the world.

Greek of the Week: Vega

[showmodule id=”58959″]

Editor’s note: This post, part of a four-part series about options Greeks, was originally published on Tuesday, September 4, 2018.

So far we’ve reviewed three options “Greeks,” with memory tricks for keeping them straight:

  • Delta: D is for direction.
  • Gamma: G is for gaining Delta.
  • Theta: T is for time decay.

Today our final Greek letter is Vega: V is for volatility.

Vega shows how much an option’s value changes based on movements in implied volatility, which expresses how much of a move the market expects from a stock. As a general rule, implied volatility increases before events like earnings, or when bearish things are happening.

Another general rule about vega is that it’s higher for longer-dated options. That’s not a surprise because the longer a contract’s lifespan, the more potential it has for big price swings before expiration.

As a result, vega tends to be the opposite from theta’s absolute value. Options with less time decay tend to be more sensitive to changes in implied volatility.

Let’s return to the options chain for Apple (AAPL). Notice how the December 225 puts have 0.48 vega while the October 225s have 0.31 vega. That means if AAPL’s implied volatility rises 1 percentage point, the change will lift the premiums on the December contracts by $0.48 while the Octobers will gain $0.31.

Apple (AAPL) chain highlighting differences in vega. Prices as of September 4, 2018. (Note: AAPL had a 4-for-1 stock split in August 2020.)

Of course, it’s more complicated than that because of other Greeks like delta and gamma. Remember that implied volatility generally rises when a stock falls. So, in that case puts would also gain value based on delta (direction).

One common way to apply this is to think of vega as an extra kicker to the downside. When a selloff occurs, puts with more vega will profit from delta, gamma and vega.

There are also trade-offs because options with higher vega are usually longer-dated. That means they have more time value (extrinsic value) and are thus more expensive. They also have less gamma. Higher cost and lower gamma can mean less leverage — even when vega works in your favor.

Some traders use vega to hedge the overall market by owning long-dated puts on the SPDR S&P 500 ETF (SPY) that are also far out of the money. Delta will be very low and vega will be very high. That way they’ll profit from the volatility spiking if the market crashes. Meanwhile, the low delta will minimize their losses from upside in the market. And, their time decay (theta) is also low.

Finally, traders selling options need to know about vega: Volatility spikes like we saw in February 2018 can really hurt you. The reason is that being short options makes you effectively short vega. And being short vega essentially makes you short volatility. If you’re also short puts that makes you long delta (because puts have negative delta). Not fun when prices move lower!

In conclusion, vega may seem a little tricky because volatility can be an opaque concept. But options traders should have a basic understanding of how it works. Hopefully this post gets you started.


Options trading is not suitable for all investors. Your TradeStation Securities’ account application to trade options will be considered and approved or disapproved based on all relevant factors, including your trading experience. See Characteristics and Risks of Standardized Options. Visit www.TradeStation.com/Pricing for full details on the costs and fees associated with options.

Exchange Traded Funds (“ETFs”) are subject to management fees and other expenses. Before making investment decisions, investors should carefully read information found in the prospectus or summary prospectus, if available, including investment objectives, risks, charges, and expenses. Click here to find the prospectus.

About the author

David Russell is VP of Market Intelligence at TradeStation Group. Drawing on two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them apprised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.