This segment of Market Measures analyzes how efficiently vega prices opportunity and risk.
Vega measures the change of the option value when implied volatility moves up by 1%. In general, if we have a greater vega, we have greater risk and greater opportunity for reward. Therefore, this study takes a closer look at how efficiently vega measures the risk and opportunity tradeoff.
The study compares the performance between a straddle, 30 delta strangle, and 16 delta strangle. The results show us that the higher delta has greater risk but greater opportunity. However, regardless of the strike width, the amount of vega we are short per unit of risk is exactly the same. Therefore, vega prices opportunity and risk efficiently. The more vega we have, the more risk we have.