Options Vega: Does Volatility Matter in Options?
Options vega is probably the most important greek to keep in mind.
It tells you how sensitive your position are with respect to the change of the options implied volatility.
Options vega is positive for short (selling) and negative for long position (buying options).
It is expressed by the amount of money your options will gain or lose in value as implied volatility fluctuates by 1%.
For example, call’s theoretical price is $3.00 and the quoted vega (varies from software to software) is $.4. If the implied volatility moves from 49% to 50%, the price will raise to $3.4.
Because that is where most time value is placed, Vega is most sensitive when option is at-the-money or its strike price = stock price.
Options vega behaves very much like options gamma.
Value of Options Vega is the same for calls and puts.
Also, it increases as options moves from in-the-money to at-the-money (its peak). Once it passes ATM, vega reduced as the options moves out-of-money.
It is important to watch this greek in conjunction with implied volatility because some options strategies are very sensitive to it.
Time spread (calendar spread) or straddle can get hurt badly if you jump in when IV is high and vega is hugh.
Options vega is partially or mostly canceled out in a vertical spread.
It won’t be 100% hedged because value of the one leg is always higher than that of the short leg.
Optionetics offers a program called Platinum that measures options vega for stock and future options.
Category: OPTIONS GREEKS
