Vega
How much an option’s price changes for a one-point move in implied volatility.
Also called: option vega
Written by Javier Sánchez Ros
In plain language
Vega measures sensitivity to volatility expectations rather than to price. A vega of 0.12 means the option gains about $0.12 if implied volatility rises one point.
Long options always have positive vega. Rising volatility helps them; falling volatility hurts, even when the underlying moves the right way.
Vega is largest for at-the-money options with more time remaining.
Worked through
Right about the earnings, wrong about the volatility
- Implied volatility before
- 78%
- Implied volatility after
- 39%
- Stock move
- +4%, as hoped
- Call premium
- lower than before
The direction was correct and the position lost money. This is the outcome that makes people give up on options, and it is entirely explicable: the call was bought when implied volatility was 78%, and part of the premium was paying for that uncertainty. Once the results were out, the uncertainty was gone.
Vega measures exactly this sensitivity — how much the option price moves per point of implied volatility. A 39-point collapse against a meaningful vega overwhelms the gain from a 4% move in the underlying.
The phenomenon has a name, volatility crush, and it is not an accident or a market failure. It is the predictable consequence of buying an option precisely when the event it is priced around is most uncertain, and holding it through the moment that uncertainty resolves.
Which is why the practical question before any earnings trade is not only "which way" but "what is implied volatility, and what will it be afterwards". Buying a 78% IV option to trade an event is paying a price that is designed to fall.
Why it matters
Vega explains the most confusing outcome in options: being right on direction and still losing money because volatility collapsed after an event.
Common mistakes
- Buying elevated-volatility options right before an event and being crushed by the post-event drop.
- Attributing a loss to the wrong cause when volatility, not price, moved against you.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
The market’s expectation of future price movement, derived from option prices.
The price paid for an options contract.
How much value an option loses per day purely from the passage of time.
How much an option’s price moves for a $1 move in the underlying.
A company’s scheduled quarterly disclosure of financial results.