Option prices do not just move with the market. They move with changes in expected volatility.
So far, we have covered how price movement and time affect options.
Today we add the third major force: volatility.
Options are not just bets on direction. They are also bets on how much the market will move.
That is where Vega comes in.
What Is Vega
Vega measures how much an option’s price will change when implied volatility changes by one point.
- Higher implied volatility = higher option premiums
- Lower implied volatility = lower option premiums
Vega tells you how sensitive your position is to shifts in volatility expectations, not just actual price movement.
How Vega Works
- Long options have positive Vega. If implied volatility rises, the option gains value.
- Short options have negative Vega. If implied volatility rises, the position loses value.
Vega is higher for longer-dated options and for options near the current market price.
Vega drops as expiry approaches.
Why Vega Matters
When you trade options, you are exposed to volatility even if you are right about direction.
- If you buy options when implied volatility is low, and volatility rises, you profit faster
- If you sell options when volatility is high, and volatility falls, you keep more premium
Ignoring Vega can turn a winning directional trade into a losing position if volatility moves against you.
Practical Examples
- Buying a call before a major announcement: you are long volatility through Vega, not just through Delta
- Selling options when volatility is high: you are short Vega, and profit if the market calms down
- Managing portfolio Vega: balancing long and short options to control sensitivity to volatility shifts
Vega is the invisible force behind many option pricing moves that price charts cannot explain.
On Derive
- Vega is shown live per position in the Greeks panel
- You can view portfolio Vega at the subaccount level
- Derive options allow you to manage Vega exposure through multi-leg structures and hedging
Understanding Vega gives you an edge that many directional traders overlook.
Your Action Today
- Open Derive and view the options chain for BTC or ETH
- Look at Vega values for near-dated versus longer-dated options
- Watch how premiums move as implied volatility changes
- Think about whether you are net long or short Vega in your current strategy
Tomorrow, we shift gears and introduce Theta, the Greek that measures time decay more deeply and precisely.
Coming tomorrow:
Day 19 – Theta Deep Dive: Understanding the Decay Curve
Hasta manana
Cpt
