Vega Neutral

AAA

DEFINITION of 'Vega Neutral'

A method of managing risk in options trading by establishing a hedge against the implied volatility of the underlying asset. A vega neutral option position will be not be sensitive to volatility fluctuations. These strategies are used to hedge against the risks of price sensitivity, second-order time price sensitivity and time sensitivity, respectively.

INVESTOPEDIA EXPLAINS 'Vega Neutral'

A vega neutral portfolio is still subject to risk. For example, in a portfolio of options maturing at different times, changes in volatility over time can dramatically affect total returns, making the portfolio sensitive to time vega. Furthermore, if the assumptions used to establish a position turn out to be incorrect, a position that is intended to be neutral can actually be risky. Vega is one of the "options Greeks" along with delta, gamma, rho and theta. These are used to measure different types of risk in options portfolios. Other options risk-management positions include delta neutral, gamma neutral and theta neutral.

RELATED TERMS
  1. Gamma

    The rate of change for delta with respect to the underlying asset's ...
  2. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  3. Gamma Neutral

    A method of managing risk in options trading by establishing ...
  4. Vega

    The measurement of an option's sensitivity to changes in the ...
  5. Rho

    The rate at which the price of a derivative changes relative ...
  6. Greeks

    Dimensions of risk involved in taking a position in an option ...
Related Articles
  1. Options & Futures

    An Introduction To Gamma-Delta Neutral Option Spreads

    Find the middle ground between conservative and high-risk option strategies.
  2. Options & Futures

    Getting To Know The "Greeks"

    Understanding price influences on options positions requires learning about delta, theta, vega and gamma.
  3. Options & Futures

    Options Trading Strategies: Understanding Position Delta

    Learn more about the position delta hedge ratio and how it can tell you the number of contracts needed to hedge a position in the underlying asset.
  4. Options & Futures

    Using "The Greeks" To Understand Options

    These risk-exposure measurements help traders detect how sensitive a specific trade is to price, volatility and time decay.
  5. Options & Futures

    What is the difference between a short position and a short sale?

    Learn how short selling and short positioning are different, specifically in regards to the nature of the commodity being bought and sold.
  6. Options & Futures

    Are there any risks involved in trading put options through a traditional broker?

    Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct option brokers.
  7. Options & Futures

    Options -- Accessing Stakes In Apple At Less Cost

    Finding Apple stock costly to trade? Here are multiple ways to trade it through low-cost Apple options.
  8. Investing Basics

    The Strange New World Of The Bitcoin Exchange Futures Market

    We explain the basics of the Bitcoin exchange and futures market.
  9. Options & Futures

    These Are The Top Brokerage Firms For Options Trading

    Trading options? Here is the list of the best brokerage firms for options trading, with features, functionality, and brokerage rates.
  10. Options & Futures

    What is a volatility smile?

    Discover what options traders mean when they refer to a "volatility smile," and learn why a volatility smile's existence perplexes many investors and analysts.

You May Also Like

Hot Definitions
  1. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  2. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  3. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  4. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  5. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  6. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
Trading Center