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Weighted vega

Vega adjusted for the fact that short-dated implied volatility moves more than long-dated, so that vega across expirations can be summed honestly.

Raw vega treats a one-point volatility move as identical in every expiration, which is wrong. Front-month implied volatility routinely swings five points while the one-year barely moves one. Adding raw vega across a calendar book therefore overstates the back-month risk and understates the front.

The usual fix scales each expiration's vega by the square root of the ratio of a reference maturity to its own. The result is a single number that behaves like front-month vega and can be compared across a portfolio.

Example: a book is long $2,000 of vega in the one-year and short $1,000 in the 30-day. Raw vega says net long $1,000. Weighted to 30 days, the one-year contributes roughly $575, so the book is net short volatility in the tenor that actually moves.

Related: vega, volatility-term-structure, position-greeks, forward-volatility

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

How an option's time value decaysA curve sliding gently downward at first and then dropping steeply into expiry, where it reaches zero.Extrinsic (time) value6420906030Value bleeds away slowly at firstDecay speeds up hereWorth nothing at expiryexpiryDays to expiry
Time decay of an option's value. The part of an option's price that is only time — its extrinsic value — drains away every day and must reach zero at expiry. The slide is gentle months out and steepest in the final weeks, which is what traders call theta.

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