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Root Strategies: Final Review

Recap concepts related to risk profiles and single-leg strategies

Vega: Implied Volatility Sensitivity

Vega indicates sensitivity to changes in
If vega is positive, we want IV to expand. If vega is negative, we want IV to contract. As you may remember from Pricing Options: Implied Volatility, IV affects an options
levels.

Shares Don't Carry Vega

Share prices are not directly affected by changes in implied volatility.

Long Options Carry Positive Vega

  • They benefit when IV expands
  • They lose value when IV contracts

Short Options Carry Negative Vega

  • They are negatively impacted by rising IV
  • Short options benefit when IV contracts

Moneyness

  • options are the most sensitive to IV changes
  • Deep
    and far
    options are less sensitive

Days to Expiration

  • Options with farther expiration dates have greater vega levels – they are more sensitive to IV changes
  • Options closer to expiration have lower vega levels – they are less sensitive to IV.

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