tion is left with the net amount.
So spreads like verticals,
calendars, butterflies, and iron
condors can have much less
vega depending on your strike
THE LONG OF I T
If you’re buying premium
ahead of a “numbers” release
(earnings, corporate events,
economic reports) and holding the po-
sition through the release, you might be
trading the wrong greek.
Say you’re going into earnings. And
because you think your stock will get a nice
bump, you buy a short-term option. Tread
with caution—this could be triple jeopardy.
If you don’t get that pop, you could lose
100% of your premium. Ok, maybe not
100%. But losing almost all of it can sure
feel like losing all of it. If you get a lukewarm pop, maybe you lose 90%. If you get
the big pop you were looking for, you could
still lose 50%.
What gives? You were likely right in your
analysis, but still lost out. That’s known as a
vol “crush.” Before a number comes out, vol
can get pumped up based on an expectation
the stock might move (see Figure 1). After
the number comes out—whether the move
happens or not—vol gets sucked out of the
We all know that vega is Greek for volatility. Right? Well, no. In fact, not only is vega
one of the most misunderstood options
“greeks,” it isn’t even a Greek letter in the
first place. And it’s often confused with
implied volatility (IV) or something else
entirely. But in the end, grasping this concept doesn’t have to be complicated.
Think of vega and volatility as siblings—
related, but each doing its own thing. In
short, vega determines how much the
dollar value of an option changes for every
one-percentage-point change in volatility (vol). It’s like a translator. If vol rises,
options values rise. If vol drops, options
values drop. Vega can often show you by
The options pricing models calculate
vega. So you’re likely to find vega hang-
ing out with delta, gamma, and the other
greeks. If trading vol is part of your play-
book, the critical informa-
tion to understand is that
vega numbers decrease as
For instance, long options
have long, or “positive,”
vega. So naturally, you want
vol to increase. On the other
hand, short options have
short, or “negative,” vega. So you’ll want to
see a drop in vol. When you combine mul-
tiple options positions, you also combine
their vegas. So, long or short individual
options, straddles, and strangles have the
largest positive or negative vega.
In the final analysis, when you combine
long and short options, you’re combining
positive and negative vegas, and your posi-
option, especially short-term options.
When you look for a big move on earn-
ings, it’s typically more of a gamma play, not
vega. You can play vega by buying straddles,
for example, or other high-vega strategies
ahead of numbers, because long vega could
profit if vol moves higher. That’s what
traders might typically think heading into
the earnings release date. But you might
consider getting out before the numbers
are released to avoid a vol crush that could
arrive with an earnings report.
One quick aside: Another benefit of
trading straddles is that heading into the
release, no one knows where the stock will
go. So delta and stock-direction risks are
neutralized at the start of the trade.
Now, keep in mind that although IV may
be rising, which could drive a profit from
long vega, negative theta may also be work-
ing against you. The straddle you have on
might also acquire a delta from the gamma
and stock movement combo, which could
work for or against you.
THE SHORT OF I T
Strategies designed to profit from increasing vol include long-vega trades like long
straddles. But you can also use short-vega
strategies in order to play a predicted drop
in inflated vol situations, such as a vol crush
after an earnings release.
FIGURE 1: Volatility chart. This implied volatility chart (bottom pane) shows increasing IV 30 days before the
earnings release. Source: thinkorswim® from TD Ameritrade. For illustrative purposes only.