The “vega” of an option provides a measure of its volatility. Just as stocks can be volatile, options can also be volatile, although there is not always a direct correlation of those volatilities. A stock whose price is volatile will typically have options with inflated prices, but it is also possible for options prices to inflate with little or no movement in the underlying stock price.

The point here is that each option has its own individual measure of volatility that is dictated by its particular price action. In options terminology, this individual volatility is called the implied volatility. The manner in which implied volatility is determined is discussed in Chapter 29, “Implied Volatility and the Black-Scholes Formula.”

Vega: The ...

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