Options Made Easy: Your Guide to Profitable Trading, Second Edition

Vega K (also known as Kappa or Lambda)

Remember from Chapter 1, “Introductions to Options,” that there are seven factors that influence an option’s price:

1. The type of option (call or put)

2. The price of the underlying asset

3. The exercise price (or strike price) of the option

4. The expiration date

5. Volatility—Implied and Historical

6. Risk-free interest rate

7. Dividends and stock splits.

Memory Tip

Vega starts with a V and stands for Volatility.

When you trade stocks, you must be aware of volatility. Volatility is a measure of how a security’s price is moving. Volatility is recognized as a measure of risk. If a stock price fluctuates all over the place in wild swings, then you’d find it uncomfortable because you wouldn’t have a clue what it was going to do next, ...