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When Option Vega Can Increase Near Expiration

Article Quant Q&A · Author: fni
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Summary

The document asks whether an option’s vega can rise as expiration approaches, despite the usual intuition that vega declines over time. The response says the answer depends on how the option’s moneyness changes: movement of the underlying toward the strike can offset the effect of time passing. It also notes that binary options can have unusual vega profiles when the underlying remains near the strike.

For a fixed strike and underlying price, the response links an increase in vega close to expiration to the reduction in total variance remaining to maturity. This is a brief qualitative explanation, not a derivation or numerical example. The original question leaves important details unspecified, including the option model and how the underlying and volatility evolve, so the observation should not be treated as a universal rule for all options.

Key ideas

  • Vega does not have to decline monotonically along a changing price path toward expiration.
  • A move in the underlying toward the strike can offset time-related vega decay.
  • Binary options may have unusual vega behavior when the underlying is near the strike.
  • For a fixed strike and underlying price, the response associates higher near-expiry vega with declining remaining total variance.

Tags

OptionsVolatilityDerivatives pricing
Full text
# Under what circumstances Veta is positive?


# Under what circumstances Veta is positive?












In general, as the option moves towards expiry, its vega is decreasing. Are there circumstances where the veta, i.e. the sensitivity of vega with respect to time, is positive, that is when vega is higher closer to maturity?

## Answer by Larasing (score -2)

https://quant.stackexchange.com/a/22105

This question is somewhat vague - for example, vega could increase despite decay because the strike is closer to underlying (spot or forward) now. On top of that, if you look at a binary option, you do have cases where underlying hugs the strike, then you have some pretty funny vega profile. For the same strike and same underlying price, because the total variance to maturity decreases with time, vega at that point actually increases pretty close to expiry.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.