Vega Neutral

Vega neutral is a term used in finance to describe a position that has no exposure to the volatility of an underlying asset. This can be achieved by either holding a position in the underlying asset and an equal amount of a put option on the asset, or by holding a position in a call option on the asset and an equal amount of a put option on the asset with a lower strike price.

Vega is a measure of the sensitivity of an option's price to changes in the volatility of the underlying asset. When the volatility of an asset increases, the price of an option on that asset will also increase. Conversely, when the volatility of an asset decreases, the price of an option on that asset will also decrease.

A position that is vega neutral is not affected by changes in the volatility of the underlying asset. This can be useful for investors who want to reduce their exposure to volatility risk.

There are a few different ways to achieve a vega neutral position. One way is to hold a position in the underlying asset and an equal amount of a put option on the asset. This will create a synthetic position that has no exposure to the volatility of the underlying asset.

Another way to achieve a vega neutral position is to hold a position in a call option on the asset and an equal amount of a put option on the asset with a lower strike price. This will also create a synthetic position that has no exposure to the volatility of the underlying asset.

Vega neutral positions can be used by investors to reduce their exposure to volatility risk. However, it is important to note that vega neutral positions do not eliminate all volatility risk. There is still some risk that the price of the underlying asset could move significantly in either direction.