Vega measures how much an option's price changes for every 1 percentage point increase or decrease in implied volatility (IV). Options with higher Vega are more sensitive to volatility changes. For option sellers, Vega is a risk factor: if IV spikes after you sell an option, the option becomes more expensive to buy back, resulting in an unrealized loss even if the stock has not moved against you.
Positive vs. Negative Vega: Option buyers are "long Vega" — they benefit from rising IV. Option sellers (like wheel traders) are "short Vega" — they benefit from falling or stable IV.
Earnings and Vega: When a company announces earnings, IV often spikes dramatically beforehand (increasing Vega risk) and then collapses afterward (IV crush). Selling options before earnings can be dangerous because any negative surprise causes both the stock to drop AND IV to spike, compounding losses for the option seller.
Examples of Vega in Action
- 1A CSP with a Vega of 0.10 — a 5% spike in IV increases the option's price by $0.50 ($50 per contract), creating an unrealized loss for the seller.
- 2Selling a put 1 week before earnings when IV is already at 80% — the risk is that IV stays high or rises further if the stock falls.
- 3After earnings, IV crushes from 80% to 30% — a $3.00 option may drop to $1.20 purely from Vega collapse, generating a quick profit for the seller.