What happens when Vega is negative?

The reason behind this phenomenon lies in the way options are priced. An option with negative vega is typically an option that is already deeply in-the-money or close to expiration. In these cases, an increase in volatility can lead to a decrease in the option's time value, thereby reducing its overall value.

Vega is a measure of the sensitivity of an option's value to changes in the volatility of the underlying asset. Understanding vega is crucial for options traders as it helps them gauge the potential impact of volatility fluctuations on their positions.

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A negative vega indicates that the value of a particular option position is inversely related to the volatility of the underlying asset. In simpler terms, when the volatility of the underlying asset increases, the value of this option position decreases.

Conversely, when the volatility of the underlying asset decreases, the value of the option position with negative vega increases. This behavior can be counterintuitive for some traders who might assume that higher volatility would always be favorable for option holders.