Vega measures how sensitive an options premium is to changes in implied volatility.

This is also sometimes called capa, though Vega is the more common term.

But what exactly is implied volatility? It's not the volatility that the underlying asset experienced in the past.

Instead, it's the volatility level that is currently implied in the options market price.

It's calculated by taking the current option price and through an option pricing model solving for volatility.

In other words, implied volatility is the volatility we need to plug into the model to get to today's market price.

It's a forward-looking measure of expected future volatility in the underlying asset that is also impacted by supply and demand. For the option intuitively, option value and volatility are positively correlated.

The more volatile the underlying assets, the wider the range of possible outcomes and the higher the time value of the option.

As a result, both calls and puts become more valuable when volatility rises.

That's why option buyers are long vaguer while option sellers are short vaguer.

But how large is this effect? And which options are most sensitive to volatility changes Since volatility primarily affects time value options with a large proportion of their premium coming from time value will have higher Vega.

That leads to three important points for the same time to expiry at the money options have the most time value.

Their outcome, whether they are exercised or not, is the most uncertain.

So their vaga is the largest deep in the money or deep outta the money. Options have very little time value.

So their Vega is close to zero options with more time to expiry, have more time value so their Vega is larger.

And that's exactly what the charts show Vega peaks for at the money strikes.

It increases with time to expiry and it drops off for deep in or deep out of the money options.

So how does Vega differ from Gamma? Since both relate to volatility? Gamma gives you exposure to realized volatility, how much the underlying asset actually moves, and how often you'll need to adjust your hedge as prices change.

Vega gives you exposure to implied volatility, how the market expects uncertainty to evolve, reflected in the options premium.

When implied volatility rises, Vaga becomes valuable, even if the underlying price doesn't move at all.

So Gamma is about what happens in the market.

Vaga is about what the market expects to happen.