What is vega and which options have the biggest vega exposure?

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AcadiFi · Accepted Answer

Vega measures the change in option price per 1 percentage-point shift in implied volatility. For a European option, ν = S·√T·φ(d1), identical for calls and puts under put-call parity. Vega is largest for at-the-money options with long time-to-expiry because φ(d1) peaks near d1 = 0 and the √T term amplifies exposure. Short-dated, deep-ITM or deep-OTM options have near-zero vega.

Example: Pradham Bioscience long-dated ATM call, S = K = $100, σ = 30%, T = 2 years. φ(0.212) ≈ 0.391, so ν = 100·√2·0.391 = 55.3 per 1.00 vol point, which translates to $0.553 per 1 vol-point move. A 3-vol-point spike adds $1.66 to the premium. Compare to a 1-month ATM call on the same name: ν ≈ 11, or $0.11 per vol point — five times smaller despite identical moneyness.

Traders hedge vega using calendar spreads or vega-neutral structures combining long and short expiries. Portfolio vega limits at firms like Montrose Asset Management cap exposure to 1% of NAV per vol point. FRM candidates should know vega is not constant: it rises with time and peaks at the forward rather than spot for high rates. Also, vega is quoted per percentage point (i.e., σ=30% means a move to 31%), not per decimal — a common trap.

What is vega and which options have the biggest vega exposure?

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