Vega Neutral


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.

BREAKING DOWN '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.

  1. Maturity

    The period of time for which a financial instrument remains outstanding. ...
  2. Theta

    A measure of the rate of decline in the value of an option due ...
  3. Hedge

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

    A method of managing risk in options trading by establishing ...
  5. Gamma

    The rate of change for delta with respect to the underlying asset's ...
  6. Greeks

    Dimensions of risk involved in taking a position in an option ...
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