how vega neutral works
vega neutral is not as popular as the neutral positions for the other greeks vega essentially tells traders how a 1 change in the implied volatility iv of an option affects the price so vega is a measure of how sensitive the option premium itself is to volatility a vega neutral position is a way for options traders to remove that sensitivity from their calculations if a position is vega neutral it doesn t make or lose money when the implied volatility changes building a vega neutral portfoliothe vega of a single position is displayed on all the major trading platforms to calculate the vega of an options portfolio you simply sum up the vegas of all the positions the vega on short positions should be subtracted by the vega on long positions all weighted by the lots in a vega neutral portfolio total vega of all the positions will be zero example of vega neutralfor example if an options trader has 100 lots of 100 strike calls that have a vega of 10 each the trader will look to short the same underlying product to eliminate 1 000 worth of vega say 200 lots of 110 strike calls with a vega of 5 this is oversimplifying it however as it doesn t take into account different expirations or any other complexities in fact if the the options have different expiry dates it becomes difficult to achieve true vega neutrality because implied volatility will generally not move by the same amount in options with different terms the implied volatility term structure shows that most options have a fluctuating iv depending on the expiration month to deal with the expiration issue a time weighted vega can be used with the caveat that it is making a big assumption in that the iv is mainly influenced by the time to expiry similarly if a trader is seeking to create a vega neutral position with options on different underlying products they have to be very confident in the degree of correlation between the two underlying products iv vega neutral strategies are usually attempting to profit from the bid ask spread in implied volatility or the skew between the implied volatility in puts and calls that said vega neutral is more often used in combination with other greeks as in a delta neutral vega neutral trade or a long gamma vega neutral trade investopedia does not provide tax investment or financial services and advice the information is presented without consideration of the investment objectives risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors investing involves risk including the possible loss of principal 