How do option books manage vega across the volatility surface?

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AcadiFi · Accepted Answer

Net vega can look flat while term-structure vega is dangerously exposed. Aurelia Szabo's desk splits vega into buckets by maturity...

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When the VIX curve steepened by 3.4 vol points in March, her nominally 'flat' book lost $847K because short-dated vega is more sensitive to curve shifts. Bucketed vega reveals the true exposure:

```mermaid
flowchart LR
  A[Total Vega] --> B[30d bucket]
  A --> C[60d bucket]
  A --> D[180d bucket]
  A --> E[1y bucket]
  B --> F[Short Vol Shock]
  D --> G[Long Vol Shock]
```

Professional vega management uses a vega grid across strike AND maturity. Skew vega captures the slope (put-call IV difference), while term vega captures maturity changes. Typical decomposition:
1. Level vega — parallel shift in all vols
2. Skew vega — steepening of put skew
3. Term vega — short-dated vs long-dated
4. Convexity (volga) — curvature of vol with respect to strike

Hedging is done with liquid VIX futures, variance swaps, or listed options at specific maturity buckets. Aurelia's limit structure: no bucket can exceed $50K vega per volatility point, and total vega across buckets cannot exceed $180K. This prevents the 'flat on paper, exposed in reality' trap.

How do option books manage vega across the volatility surface?

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