Vega

From MarketsWiki
Jump to navigation Jump to search


Straits Financial-370x90.png


Vega is the rate of change of an option price relative to a change in volatility. It is one of the greek factor sensitivities used to measure exposures in derivatives portfolios.[1]

Vega is quoted in a way to demonstrate the theoretical price change for every 1 percentage point change in volatility.[2] For example, if the theoretical price is 2.5 and the Vega is showing 0.25, then if the volatility moves from 20% to 21% the theoretical price will increase to 2.75.

Vega is the only greek option value that isn't represented by a real Greek letter.[3] Vega is sometimes called kappa.[4]

The higher the volatility the higher the option prices. The reason for this is that higher volatility means a greater price swings in the stock price, which translates into a greater likelihood for an option to make money by expiration.

With positive Vega, the value of a long option increases when implied volatility increases; it decreases when volatility decreases.

With negative Vega, the value of a short option decreases when implied volatility rises; it increases when volatility goes lower.[5]

Resources[edit]

References[edit]

  1. Vega. Riskglossary.com.
  2. Option Vega. Option Trading Tips.
  3. The Greeks" What they are and how to use them. Thinkorswim.
  4. Vega. Riskglossary.com.
  5. Options Indicators (the Greeks): Vega. QQQOptionsTrading.com.