Vega
Vega measures the sensitivity of an option's price to a one-percentage-point change in implied volatility. A Nifty option with a vega of 50 would gain or lose approximately ₹50 per unit for every 1% rise or fall in implied volatility, all else being equal.
Vega is highest for at-the-money options and for options with more time remaining before expiry. Longer-dated options are more sensitive to changes in implied volatility because there is more time over which the higher or lower volatility can manifest. Conversely, options very close to expiry have negligible vega, as there is little time for volatility to affect the outcome.
On NSE, vega exposure was most pronounced around scheduled macro events. Ahead of the Union Budget, RBI monetary policy meetings, and general election result days, India VIX and the implied volatility of Nifty options rose significantly. Participants who held long options through such events had positive vega working in their favour as premiums swelled. However, after the event, implied volatility typically contracted sharply — an IV crush — and vega turned into a liability for those who maintained their positions.
In multi-leg strategies such as calendar spreads, vega plays a structurally important role. A calendar spread — selling a near-dated option and buying a longer-dated option at the same strike — is typically a long-vega trade, as the longer-dated option has higher vega than the shorter-dated one. A rise in IV benefits this structure, and a fall in IV hurts it, irrespective of the direction of the underlying.
A misconception is that vega is purely theoretical and of limited practical relevance to retail participants. In practice, the IV crush observed after major Indian market events has historically caused long option positions to lose substantial value even when the directional move was favourable. For example, a participant who purchased Nifty ATM straddles before a budget announcement and saw Nifty move 200 points may have still experienced a net loss if the IV fell by 3–4 percentage points post-announcement.
Vega is sometimes confused with volatility itself. Vega is the sensitivity measure — the change in option price per 1% change in IV. Volatility is the input. Understanding this distinction is important when constructing volatility-targeting strategies or when assessing the risk of existing positions relative to potential IV movements.