Chapter 9

Veta

The sensitivity of the vega to changes in time to expiration, sometimes referred to as either vega decay or DvegaDtime or Veta.

Veta = d(Vega)/d(Time)

This represents the change in Vega, as time to expiration of the option decreases or changes. So as an example, if veta = 2 for a particular Nifty call option, for days to expiry (DTE) = 2, implies that for a single day of reduction in DTE, the change in option vega would be 2.

The above plot indicates the values of option Greek, vega across strikes for varied DTE, for eg. Vega-9 stands for DTE =9 and IV has been taken as 20%.

  • The influence of time decay on volatility exposure measured by Vega is mostly felt in the ATM area especially for options with short time to maturity.
  • It has been observed that Vega impact on option value decreases as DTE decreases contrary to the popular myth that volatility is responsible for expiry-based option fluctuation.

Ahead two plots of different IVs are displayed, with IV = 20% and IV = 40% respectively:

  • Notice that vega decays, as DTE decreases and the boundary or the highest value is that of ATM options, denoted by the yellow curve.

  •  

    The ATM, OTM AND ITM curves get closer as the IV increases, as visible from the second plot (IV= 40%).

FAQs

What is Veta in options? 

Veta is a second order option Greek, measuring the sensitivity of Vega with option expiry, sometimes referred to as either vega decay or Dvega/Dtime.

What is the disadvantage of Veta? 

Veta, only measures the vega decay wrt time, or days to expiry (DTE). As a result, it does not provide a complete picture of the risk exposure of an options position. To get a more comprehensive view of an option's risk, traders must consider other option Greeks, including second order greeks too.

What affects Veta? 

The influence of time decay on volatility exposure, measured by Vega, is mostly felt in the ATM area especially for options with short time to maturity, or lower DTE.