11.31What is vega?
1What is it?
Vega shows how much premium changes for a 1% change in implied volatility.
2Why does it exist?
Even if price doesn’t move, a drop in IV can shrink premiums, which is the IV crush.
3Calculation
- Premium 200, vega 12. IV falls 5% → premium ≈ 200 − 60 = 140.
Buyer loses 60 points without any price move.
4Quick revision
- Sensitivity to IV.
- Longer-dated options have more vega.
5Knowledge check
Q1. Vega 10, IV +3%. Premium change?Show answer
≈ +30.
Q2. Why do buyers lose in IV crush?Show answer
Falling IV reduces premium (vega effect).
Q3. More vega: near or far expiry?Show answer
Far expiry.