Definition
Vega measures how much an option's price changes for every 1 percentage point change in implied volatility — a vega of 0.10 means the option gains $0.10 in value for every 1% increase in IV and loses $0.10 for every 1% decrease, making it the primary Greek affected by IV expansion before events and IV crush afterward.
Example
“My straddle had a vega of 0.25. IV went from 55% to 80% in the three days before earnings — a 25% increase. My position gained $6.25 per share from vega alone ($0.25 × 25) before the stock moved at all. That's vega working for you.”
Detailed Explanation
Vega is the reason options get expensive before major events and cheap afterward. In the days and weeks before earnings, FDA decisions, or FOMC meetings, implied volatility expands as market participants bid up options to express directional views or hedge existing positions. That IV expansion flows directly through vega into higher option prices. A long straddle (owning both a call and a put) benefits from this — its total vega is positive, meaning rising IV makes the position more valuable even before the underlying moves. This is why buying straddles weeks before earnings as a "volatility trade" can be profitable even before the actual event occurs.
The flip side is IV crush — the collapse in implied volatility after the event resolves — which punishes long option holders through negative vega impact. If you own options going into earnings with high IV, once the event passes and uncertainty resolves, IV can drop 50-70% in a single day. Your vega exposure means the option loses that percentage of value on the IV component regardless of what the stock does. This is the structural headwind every long option holder faces after binary events: being right about direction while still losing money because vega-driven losses exceeded your directional gains.
Vega is highest for longer-dated options (more time for volatility to manifest) and lowest for very short-dated options (less time means less vega sensitivity). This creates a strategy implication: if you want to trade the IV expansion before earnings without taking on directional risk, use longer-dated options (higher vega means more gain per unit of IV increase). If you want to minimize exposure to IV crush after an event, use short-dated options (lower vega means less damage per unit of IV decrease). Matching your option's time structure to your specific thesis — directional vs. volatility — is a key component of intermediate options strategy.