Definition
Vega
Vega measures how much an option's premium changes when implied volatility rises or falls by 1%.
Vega is not a true Greek letter, but it sits alongside the others. When India VIX jumps before an event — a Budget, an RBI policy, or election results — implied volatility rises and option premiums inflate even if the index hasn't moved. A long option with high vega gains from this; a seller loses.
Longer-dated options (monthly contracts) carry more vega than the weekly expiry, because there is more time for volatility to matter. Traders who expect a volatility spike buy vega via straddles or strangles; those expecting calm sell it, knowing IV crush after the event will erode premiums.
Related terms
- IV CrushIV crush is the sudden collapse in implied volatility — and option premiums — right after a major event passes.
- Long StraddleA long straddle buys a call and a put at the same strike to profit from a big move in either direction.
- India VIXIndia VIX is the volatility index that measures the market's expectation of near-term volatility, often called the 'fear gauge'.
- Implied VolatilityImplied volatility (IV) is the market's forward-looking estimate of how much a stock or index will swing, backed out from current option prices and expressed as an annualised percentage.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.