Stock Market · Options Theory

Vega

Vega measures how much an option's price changes for every 1 percentage point change in implied volatility (IV). It's the Greek that most beginners ignore, and the one that causes the most surprise losses.

What vega means

Vega = change in option price per 1% change in IV

If an option has vega of ₹10 and IV increases from 15% to 16%, the option price rises by ₹10 per share.

If IV drops from 15% to 14%, the option price falls by ₹10. Regardless of where the underlying is.

Where vega is highest

• ATM options have the highest vega
• Longer expiry options have higher vega than shorter expiry
• Vega is always positive for option buyers (rising IV helps), negative for sellers

The IV crush problem

You correctly predicted that Nifty would drop before an RBI policy. You bought puts when IV was 18%. RBI's dovish policy caused a market dip, but also caused IV to crash to 12%.

Your puts lost value from two forces:

1. Delta: Nifty didn't fall enough

2. Vega: IV fell, destroying the time value you paid for

> Many correct directional predictions still result in option losses because IV was high when you bought. The premium was too expensive.

Buy options in low IVbuy when premiums are cheap relative to historical volatility

Sell options in high IVsell when the market is paying too much for insurance

Check India VIX (India's volatility index on NSE) before buying options. High India VIX = expensive premiums. Low India VIX = cheap premiums.

Takeaway. Vega measures IV sensitivity. Buy options when IV is low (cheap premiums). Sell when IV is high (collect inflated premium). IV crush after events destroys even correct directional bets.