Options Basics, Part 5 (Vega)
Vega is a measure of the impact of the volatility of the underlying asset price on the option price. When the volatility rises (falls) by 1%, the change in the option price is Vega.
As long as the option buyer hopes that the volatility will increase, the option price will increase; the option seller hopes that the volatility will decrease, and the option price will decrease.
For example, if you buy an underlying asset with an implied volatility of 20%, the asset price is 100 yuan and the option premium is 2 yuan. One day later, the underlying asset price is still 100 yuan, but the implied volatility drops to 15%, and the option premium price drops to 1.5 yuan. Then the buyer of the option, that is, the party that is long Vega, will lose money.
Characteristics of Vega:
1. For the option buyer, an increase in volatility will bring benefits, that is, Vega is positive.
2. For the option seller, a decrease in volatility will bring benefits, so Vega is negative
3. The uncertainty of whether the at-the-money option will be exercised at expiration is the greatest, and it is most sensitive to changes in volatility, so the Vega of the at-the-money option is the largest.
