A Vega Neutral strategy is a risk management method in options trading that works by establishing a hedge against the implied volatility of the underlying asset. Options traders may use a vega neutral strategy when they believe volatility presents a risk to the profits.The vega of an option is a measure of how much the price of an option changes in response to changes in implied volatility. When you establish a hedging position using options, you are effectively buying or selling protection against future changes in implied volatility. By buying and selling options with different sensitivities to changes in implied volatility,you can create what is known as a pair trade or straddle, which can minimize your losses if there is a large move in either direction.There are two main types of Vega neutral strategies: long straddles and short straddles . Ina long straddle, the trader buys both a call and put option with the same strike price and expiration date. This gives them exposure to both up side and down side potential if there is a correction in prices. In a shorts tr addle,the trader sells both call and put options with the same strike price and expiration date. This gives them limited exposure to either eventuality should prices remain range-bound.
