What is veta and how does it affect long-dated option valuation?

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AcadiFi · Accepted Answer

Veta, also written DvegaDtime, is the partial derivative of vega with respect to time. It tells you how a position's volatility exposure decays as time passes. Unlike theta, which measures price decay, veta measures vega decay. Long-dated options have high vega but veta pulls that vega down gradually, while short-dated options see vega collapse quickly.

Take a LEAPS-style position: 200 long calls on a fictional utility company named Vireocore Energy with 18 months to expiry. Vega is 0.65 per share per vol point. Veta is 0.0018 per day. Over the next 90 days, vega decays by roughly 0.16, falling from 0.65 toward 0.49. If implied vol is stable, the position's vol exposure materially shrinks even without price action. A portfolio manager relying on long vega must plan for this veta bleed and may need to roll into longer-dated options to maintain the target exposure.

Veta is largest for at-the-money options with moderate time remaining, small for very short-dated options (vega is already near zero) and small for very long-dated options (vega is large and stable). For CFA candidates, the practical takeaway is that volatility risk is not just about implied vol moves but also about the passage of time eroding vega itself. Risk reports on insurance products, variable annuities, and pension hedges often track veta because their liabilities span decades and vega evolution dominates P&L attribution.

What is veta and how does it affect long-dated option valuation?

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