Vega (v) is the wild card in option pricing models. Because Implied Volatility is an estimation of future price fluctuations, the Vega and Implied Volatility are crucial aspects to options trading. This topic will be covered in detail more in the advanced courses.
Vega is the rate of change of an option’s theoretical value relative to the change in the underlying stock’s Implied Volatility (IV). Vega is positive for long call and long put positions and negative for short call and short put positions. The reason for this is because rising IV increases option premiums. Vega is represented as a decimal and relates to a one percentage point move in the underlying stock’s Implied Volatility.
When IV rises in the underlying stock, both long call and long put positions will profit, even if there is no movement in the underlying stock price.
An investor is long the Apache December 100 call that
has a premium of $1.60 and a Vega of .09.
A 1% RISE in IV in the underlying stock will increase the call premium
to $1.69
(positive for long Vega positions and negative for short Vega
positions)
A 1% DECREASE in IV in the underlying stock will decrease the call
premium to $1.51
(negative for long Vega positions and positive for short Vega
positions)
Puts and calls with the same expiration month, underlying stock and strike price will typically have the same Vega.
ATM options have higher Vegas than ITM or OTM options.
Vega will decrease in option premiums as expiration approaches.
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