Vega Trading

Vega trading is a form of volatility trading focused specifically on implied volatility (IV) changes. Volatility trading more broadly can include trading realized volatility (through gamma scalping) or volatility products. Vega trading specifically profits from IV moving in your expected direction.

Yes! Being long vega means buying options (straddles, strangles, calls, puts), which is permitted in TFSAs. Short vega positions (selling naked options) require margin and are not allowed in TFSAs.

Your profit = Position Vega × IV Change. If you have $50 of vega exposure and IV rises 10%, you make approximately $500 from vega. Actual results also depend on delta/gamma effects and theta decay.

Long vega profits when IV rises (benefiting from volatility expectations). Long gamma profits when the stock actually moves (benefiting from realized volatility). They often go together when buying options, but can be separated using structures like calendars (long vega, less gamma).

Sometimes you have a better view on volatility than direction. For example, you might believe IV will spike before earnings but are unsure if the stock will go up or down. Vega trading lets you profit from the IV spike regardless of direction.

Straddles have maximum vega but also maximum theta decay. Calendars have less vega but can have neutral or positive theta. Choose straddles for maximum vega exposure (and expect large IV move soon). Choose calendars for more patient approach with theta mitigation.

Not always. While broad market moves often shift the entire surface, events can cause near-term IV to move more than far-term (term structure change) or OTM put IV to move more than ATM (skew change). This is why advanced traders analyze the full surface.

Use IV Rank (where is IV relative to past year's range?) and compare IV to recent realized volatility. If IV Rank is low (<30) and IV is below recent realized vol, options may be cheap. If IV Rank is high (>70) and IV exceeds realized vol, options may be expensive.

Yes! While Canada doesn't have VIX products, you can trade vega using options on individual stocks (RY, TD, SU, etc.) or on XIU (TSX 60 ETF). The same principles apply - buy options for long vega, sell for short vega.

As the stock moves away from your strikes, vega decreases (ATM options have most vega). Your original vega exposure may diminish. Also, big moves often cause IV spikes (helping long vega) but gamma effects matter too. Monitor position Greeks as stock moves.

Use calendar spreads to bet on term structure changes. If you expect backwardation to normalize (near-term IV to drop vs far-term), buy calendar spreads. If you expect term structure to invert (near-term IV to spike), sell calendars or buy reverse calendars. Track the term structure spread over time.

Vanna is the sensitivity of vega to changes in stock price (or equivalently, sensitivity of delta to IV). As the stock moves, your vega changes. This means vega exposure is path-dependent - a big stock move can reduce your vega even before IV changes.

Professionals often hedge with other options across the surface. They might buy vega in one area and sell in another to capture relative value. Index options (SPX, or XIU in Canada) can hedge systematic vega risk. Some use variance swaps for pure vol exposure.

Canada lacks direct VIX products, but you can approximate market volatility exposure using ATM straddles on XIU. This gives broad market vega. The exposure isn't identical to VIX (which uses a strip of options), but it captures market-wide IV changes.

Size by vega dollars, not contracts. Set a portfolio vega budget (e.g., max $500 per 1% IV move). Allocate across strategies (earnings plays, macro bets, mean reversion). Monitor aggregate vega daily. Stress test: 'If IV moves 20 points, what's my P&L?'