Chapter 9Vega

Vega (c09-math-001, sometimes kappa is used: c09-math-002) is the change of the value of an option in relation to the change of the (implied) volatility.

It is the derivative of the value of an option in relation to the volatility of the underlying, mathematically: c09-math-003. Throughout the book the Greek letter ν will be used for denoting the vega. The formula for calculating it is as follows: c09-math-004, where c09-math-005 is the probability density function. The vega has a log normal distribution.

As earlier mentioned; put call parity dictates vega to be the same for calls and puts, otherwise arbitrage opportunities may arise. Vega will be positive for owning the options (irrespective of calls or puts) and negative for being short them.

The vega is expressed in dollars per option. So if an option would have a vega of $0.20, like the 50 strike as shown in Chart 9.1, a 1% increase in volatility would make the option (call or put) 20¢ more expensive. A 1% decrease in volatility would result in a 20¢ lower value for the option. ...

Get How to Calculate Options Prices and Their Greeks: Exploring the Black Scholes Model from Delta to Vega now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.