Check out the top 4 stocks to watch in October 2022
tastytrade logo
uploaded image

Jul 6, 2017

Research Specials: Vega of Low IV Strategies

By:Sage Anderson

Fans of tastytrade's internal research will want to keep their eyes peeled for a killer series featuring "a few good men" from this team on a newly developed show called Research Specials (Live).

If you haven't tuned in previously, you might consider starting with the episode entitled "Vega of Low IV Strategies," which provides a really interesting perspective on a very important topic.

During periods of depressed volatility, traders often consider strategies that take advantage of a potential reversion in volatility toward the historical average (i.e. higher). VIX has of course been hovering around 10 for most of 2017, while the average in VIX is closer to 19.

A recent blog post expanded on strategies that traders might consider when volatility is low, and we recommend reviewing that information if you haven't already. One key approach detailed in this piece is the time spread, or calendar spread.

Calendar spreads are executed by simultaneously purchasing an option with a longer-dated expiration month, while selling an option with the same strike in a shorter-dated expiration month. The short-dated sale effectively helps to reduce the cost of the premium that has been purchased in the out-month expiration.

Because we have deployed a position that is net long premium (i.e. debit spread), the calendar spread is characterized by long vega, and therefore benefits from an increase in implied volatility.

Ideally, the underlying will sit still, or move toward the strike price of the shorter-dated option until that leg has rolled off. After that, the owner of a calendar spread will be hoping that the underlying makes a big move up (in the case of a long call) or down (in the case of a long put), or that implied volatility increases.

For these reasons, deploying a calendar spread is ideal when one has a neutral (sideways) outlook for the underlying while the short is in play, coupled with a desire to be an owner of volatility over the longer term.

This episode of Research Specials (Live) does a great job of outlining the mechanics of a calendar spread while also presenting some important insights into the behavior of vega in these positions.

Vega is, of course, one of the "Greeks," which together make up a group of parameters that measure the sensitivity of an option's value to changes in certain market-related elements. Vega is the Greek that reports how much an option's price will change given a 1% change in implied volatility.

As you can see in the graphic below, longer-dated options have more vega than shorter-dated options (all else being equal):

The chart above clearly shows how options with more days-to-expiration (DTE) have higher vega and consequently are more sensitive to changes in implied volatility.

Along those same lines, it's also somewhat easy to see how the passing of time can have a big impact on long vega positions. If the underlying sits still, or implied volatility declines, traders owning these options will suffer.

To combat that decay, traders may decide to sell another short-dated option against their longer-dated options, once the original short-month option rolls off. This is, of course, prudent only if the trader expects neutral (sideways) movement in the underlying to continue.

Of course, the specific risk taken at any time is dictated by each trader’s unique risk profile, investment goals, and strategic approach.

We recommend watching the full episode of Research Specials (Live) focusing on the vega component of long calendar spreads when your schedule allows.

Additionally, we hope you'll tune into future episodes from this series as they are released.

If you have any comments, suggestions, or questions we welcome your feedback in the space below, or through a direct email to

We greatly appreciate your continuing involvement in the tastytrade community!

And as always, thanks for reading.

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Related Posts

tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on 

tastytrade is a trademark/servicemark owned by tastytrade.

tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).

tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.

Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

© copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.