Market Measures

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Vega & Risk

Market Measures

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

Vega measures the change of the option value when implied volatility moves up by 1%.

Different strategies we employ have different vega values, but most of them are short volatility trades.

What strategy would be optimal if we wanted to get short the most volatility with the least amount of risk?

Study

We find that with higher delta strangles, we get higher opportunity from vega, but also higher risk (SD of P/L). Additionally, it seems that no matter how wide our strikes are, the amount of vega we are short per unit of risk we take on is the exact same. This suggests that opportunity and risk are priced efficiently.

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