This article is going to be short but not so sweet.

Many of you are aware that some trades, such a long calls or puts, debit spreads or calendars are long vega trades. This means that once the trade is completed the vega is positive. Vega measures how much your position gains if volatility expands and how much it losses if volatility drops. The volatility being discussed is the volatility of the options. If volatility drops, it doesn't impact each option in a complex position exactly the same, but the position vega does give us a measure at least. Most brokerages will provide you with an account of the position vega.

Even if we don't want to think about vega, it's helpful to know that these positions benefit from a rise in volatility if nothing else changes. The positions may be hurt or helped by price action, but an increase in volatility tends to plump up option values, either adding to price-related gains or partially or fully offsetting losses due to price action.

Vega-negative trades are the opposite, of course. These include sold calls or puts, butterflies, credit spreads and iron condors. In the case of sold calls or puts, an increase in volatility tends to plump up the price of those options, but you've sold them and you want their prices to drop. In the case of iron condors and the credit spreads that form them, an increase in volatility tends to plump up their values, widening the spreads, or at least keep them from narrowing as much as expected when a price move seems to be in the seller's favor.

On May 20, I just happened to catch an example of the way volatility impacted prices. The previous day, an SPX JUN 1255/1265 call spread had a mid price of $0.80, with the mid price of the individual options at $2.50 and $1.70. The next morning, at 11:28 am CT, with the SPX at 1082.33 and down $32.72, you would have expected that call spread to have narrowed and to be worth less. However, such an expectation wasn't taking into account the effect of the change in volatility. Those of us who sell iron condors or credit spreads do hope for prices to move away from the sold strike, expecting the spreads to narrow. We can then usually buy them back for less than we spent for them. However, we don't want that price action to occur so quickly that volatility is hiked up too far.

Too high of a hike in volatility keeps the spread prices inflated. Even with that $32.72 drop in the SPX in our example, the mid prices of those 1255's was $1.95 and the mid price of the 1265's was $1.18. What's striking about that is how well the calls held onto their value after an almost $33.00 drop. Even more striking is the fact that mid price of the spread was $0.77, only three cents cheaper than it had been before that huge drop.

This is why iron condor traders are hurt by rising volatility and other trades that are long vega are helped. In some circumstances a good idea would be to sell iron condors or other short vega trades after volatility has sharply risen and is expected to drop. However, it's not a good idea to sell an iron condor when one expects volatility to sharply rise or keep rising, if it has already been doing so. If one does sell an iron condor in that circumstances, extra put insurance is imperative.