Vega

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Vega

Vega represents the amount an option’s price will change with a 1% change in the implied volatility of the underlying security.For example, assume Stock ABC is trading at $20. A call option has six months until expiration with an implied volatility of 15% and a Vega of .05. The option’s price is $1. With a Vega of .05, each 1% increase in implied volatility equals a $0.05 increase in the option’s price. If implied volatility rises from 15% to 20%, then the option’s price would be expected to rise by $0.25 (5 X .05 = .25). The new option price would be $1.25. If implied volatility decreases from 15% to 13%, then the option’s price would be expected to decrease by $0.10 (2 X .05 = .10). If this happened, the new option price would be $1.90.Another thing to note, options that have a longer amount of time until expiration tend to have a higher Vega value than options that have a shorter amount of time until expiration. This is because longer-term options have a higher premium than shorter-term options. So, a 1% change in the implied volatility of the longer-term options will have a greater price change than a 1% change in the implied volatility of the shorter-term options.After having read this article, an investor should have a better understanding of what the option Greeks mean and what they are used for. This new skill will be helpful in achieving options trading success.