The Vega of an option indicates how much, theoretically at least, the price of the option will change as the volatility of the underlying asset changes.
Vega is quoted to show the theoretical price change for every 1 percentage point change in volatility. 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 most sensitive when the option is at-the-money and tapers off either side as the market trades above/below the strike.
The above graph plots the option Vega vs Underlying price for 3 different strike prices. Notice that the behaviour of an option Vega is similar to Gamma: increasing as the option moves from being in-the-money to at-the-money where it reaches its peak and then decreases as the option moves out-of-the-money.
Note: like the Gamma, Vega is the same value for calls and puts.
Comments (17)
Peter
January 26th, 2012 at 5:58pm
The symmetrical comment below was in reference to the fact that Vega is the same value for calls and puts.
I agree that the Vega values for OTM options will have a larger percentage increase on their prices than for ITM options, however, the absolute values for Vega does indeed taper off either side of ATM to shape a bell type curve.
enter
January 25th, 2012 at 7:48am
why is the vega symmetrical? wouldnt it make sense for the option price to be more sensitive to volatility when it is out of the money as opposed to in the money?
Considering, when the option is out of the money, the volatility increasing represents a higher chance of the option paying out money at the end of the day. When its in the money, the option is already most likely going to pay out money, so an increase in volatility cant (potentially) change the price as much.
Peter
July 9th, 2011 at 7:06am
You mean symmetric for calls and puts? Then yes, as Vega is the same for calls and puts.
John
July 8th, 2011 at 7:01am
Hi,
Thanks for this. Are the curves symmetric?
Cheers
Peter
May 2nd, 2011 at 8:39pm
Vega estimates how much an option will gain or lose in value as the volatility of the underlying asset changes.
It is useful to be able to measure the amount of risk your portfolio has in relation to swings in volatility.
shrutika
May 2nd, 2011 at 2:38am
What is the Vega of an option and why is it useful? Discuss the steps you would undertake to make a portfolio Vega neutral?
Pierre
March 11th, 2011 at 12:18pm
So actually the value of the stock is fixed. Thanks Peter, I think I get it.
Peter
March 9th, 2011 at 5:24pm
That's because Vega is the output generated from a pricing model, which is applied to an option. The option is "based" on an underlying, which can be a stock. The stock cannot have any vega because the stock "is" the underlying and doesn't have a strike price, expiration date etc.
You're probably looking at the standard deviation of the returns of a stock's movement and comparing this to the Vega of an option, which is not the same thing.
Pierre
March 9th, 2011 at 5:13am
Hi,
can anyone explain me why the vega of the underlying is 0? I have read it in the Hull but don't really understand where it comes from, since when I happen to differentiate the stock price -modelled e.g. by a geometric brownian motion- with respect to sigma, the quantity does not look like 0 to me!
Thanks in advance
Peter
March 5th, 2011 at 9:59pm
Do you mean forecasting volatility? I've never come across any methods that use Vega to forecast volatility before. I've heard of methods such as GARCH that attempt this but I don't have any experience with these strategies so I can't comment directly.
Throb
March 5th, 2011 at 5:15pm
Can vega be used to "theorized" expected forward IV spots?
Peter
January 17th, 2011 at 5:25am
Hi Pankaj, Vega is always positive for calls and puts for both European and American options. This is because an increase in volatility always increases the theoretical value of an option - call or put.
Pankaj
January 16th, 2011 at 7:59pm
Hello friends,
Can anybody explain why Europeon Call option in Black-Scholes Model has always +ve Vega.
Peter
December 30th, 2010 at 9:23pm
Hi Damola, check out the option greeks overview page first and let me know if you have any follow up questions.
damola
December 27th, 2010 at 2:56am
hi guys
This page has added to me tremendously on first sight....thumbs up!!!!!!
pls i need to know the relevance of theses greeks cuz i am just starting out in trading.....pls help with direction...tnx
Peter
December 19th, 2010 at 9:31pm
Check out the information page on Option Greeks, which will explain why Option Greeks are useful.
madhuri
December 18th, 2010 at 3:59am
dear friend,
I couldn't understand why we should know about theta& vega greeks!
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