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Explained to a learner in my DMs who underestimates the vega risk of a near dated option:
It's true that the near term option's vega is not large. But that is counterbalanced by the fact that near term IVs move faster (ie are more volatility then longer term IVs)
It's true that the near term option's vega is not large. But that is counterbalanced by the fact that near term IVs move faster (ie are more volatility then longer term IVs)
A 1 month ATM option has 1/2 the vega of a 4 month option.
But if the 1 month IV is twice as volatile it's the same vega risk.
Need to consider vega and the vol of vol.
But if the 1 month IV is twice as volatile it's the same vega risk.
Need to consider vega and the vol of vol.
(This is a doorway to a whole discussion about term structure and vega scaling but I'm not running down that stuff anytime soon...maybe @AgustinLebron3, @Ksidiii, or @volmagorov can thread one while sitting on a toilet)
