This lesson will cover short Vega positions. As state in the previous lesson, Vega is the rate of change of an option’s theoretical value relative to change in the underlying stock’s Implied Volatility. For written option positions, Vega is ALWAYS negative. This means a rise in the underlying stock’s IV will lead to increasing option premiums, which is negative for written (short) positions. Remember, the goal of writing options is for them to lose their value and eventually expire worthless.
When IV falls in the underlying stock, both short call and short put positions will profit, even if there is no movement in the underlying stock price.
An investor is short the Apache December 85 put that
has a premium of $0.40 and a Vega of -.04.
A 1% RISE in IV in the underlying stock will increase the put premium to
$0.44
(negative for short Vega positions and positive for long Vega
positions)
A 1% DECREASE in IV in the underlying stock will decrease the put
premium to $0.36
(positive for short Vega positions and negative for long Vega
positions)
Future lessons will focus on volatility in much more detail. For now, it is important to simply understand the Vega relation to option premiums.
| < Prev | Next > |
|---|