What stocks have had a 52-week low?
tastytrade logo
uploaded image

Dec 13, 2018

Vega: Analyzing Risk vs. Reward

By:Sage Anderson

When implied volatility moves up and down a lot, as it has been in recent weeks, most of us become more attuned to our portfolio's exposure to vega.

As a reminder, vega is one of the Greeks and is usually defined as "the measurement of an option's sensitivity to the changes in the volatility of the underlying asset.”

Vega is typically expressed as the amount of money that an option's value will gain or lose as volatility rises or falls by 1%. All options (calls and puts) generally increase in value when volatility expands, and decline in value when volatility contracts - all else being equal.

Generally speaking, options with longer-dated maturities will have a higher percentage of vega than options with shorter-dated maturities. Also, vega is higher for at-the-money (ATM) options as compared to out-of-the-money (OTM) options.

Looking at a practical example, imagine a hypothetical put in SPY that has a vega of 0.20.

If the VIX increases by one point, the value of the above option will theoretically increase by $0.20. Likewise, if the VIX drops by 1, the value of that option should theoretically decrease by $0.20.

If you are short the above option, and the VIX goes down by 1, that’s beneficial to your position. If you are long the option, and the VIX goes down by 1, that's theoretically detrimental to your position.

Having reviewed some of the key aspects of vega, we can now take a closer look at some new tastytrade research on the subject.

On a recent episode of Market Measures, the hosts shift the vega conversation from individual positions, to spread positions. The focus of the episode is whether or not different types of spreads can help unlock superior performance in terms of vega and the bottom line.

In order to keep the focus on vega, the episode focuses on delta-neutral spreads (straddles and strangles), because this helps to remove the directional impact on P/L from the equation.

The specific question asked on the show is whether there's a optimal strategic approach for getting short the most vega, with the least amount of risk.

In order to answer this question, a study is designed in SPY that backtests three different spreads using data from 2005 to 2017. The three different spreads backtested in the study were a straddle, a 30 delta strangle, and a 16 delta strangle.

While the complete results of the study are certainly worth reviewing, the key takeaway from the study appears to be that when trading vega, the proportion of risk versus reward tends to remain relatively constant. In short, that means that if you take on more vega, no matter whether it's an individual position or a spread, the amount of risk in the position rises by an equal amount.

The findings from this examination seem to suggest that diversification is prudent, even from a vega perspective. This dovetails well with previous tastytrade research that indicates diversifying in terms of underlying and strategy (i.e. position type) can help reduce risk in the portfolio.

We hope you'll take the time to review the complete episode of Market Measures focusing on vega risk when your schedule allows.

In the meantime, if you have any comments or questions relating to the above material, we hope you'll reach out by leaving a message in the space below, or contacting us at @tastytrade on Twitter by email  at

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.