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        Meet the Options Greeks

        Views 23212022.12.21

        Meet the Greeks - Vega

        Options Greek Vega measures an option's sensitivity to implied volatility.

        Volatility gauges stability. To be more specific, if an option's price changes dramatically, it is considered highly volatile; conversely, if the price does not move much, the option is of low volatility.

        Implied volatility measures how much the stock is expected to move in a given timeframe based on an option's current price.

        Vega = Option's Price Change / Volatility Change

        For example, suppose there is a $7.5 call option with a Vega of 0.12. Its implied volatility is at 20%.

        If its implied volatility goes up from 20% to 21.5%, its volatility increases by 1.5.

        According to the formula, the option's price change is 1.5X0.12=0.18. The option's price is expected to rise to $7.68.

        On the contrary, if the implied volatility decreases from 20% to 18%, volatility is expected to drop by 2.

        The option's price change is 2X0.12=0.24 and the option's price will drop to $7.26.

        In conclusion, the closer the option's price to the strike, the higher Vega's value. But the value decreases as the expiration nears.

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