Options trading part 9: Weighted Vega & trading the term structure

The “weighted Vega exposure” lets us quantify our options position with different maturities into a single figure that reflects our total exposure to implied volatility for our options contracts with different maturities. There are opportunities for volatility traders to trade the term structure.

Maturity of an option contract and implied volatility

The maturity of an option contract refers to the time left until the option expires.

Due to variables such as the underlying asset’s volatility and the market’s anticipation of where the underlying asset’s price will be at the option’s expiry, options with various maturities may exhibit vastly different behaviors.

For instance, if the underlying asset is very volatile, options with shorter maturities often have greater implied volatilities than options with longer maturities.

That is because there’s more uncertainty in the shorter period; therefore, investors will seek a greater premium (i.e., higher implied volatility) for options that expire in the shorter term.