Option vega measures how much the price of option changes in relation to the Volatility of the Underlying asset or commodity. Vega represents the change in option value for a 1% change in the level of Implied Volatility. For example, an option may have a value of $5 and a vega of 0.20. If Volatility is 25% and it rises to 30%, then the option’s value would increase to $6 (all things being equal and without considering the values of the other Greeks).
Since Volatility is a key determinant of an option's Extrinsic Value, vega allows the implications of a change in Volatility to be quantified and predicted.
Contributed by: Ralph Windsor
Since Volatility is a key determinant of an option's Extrinsic Value, vega allows the implications of a change in Volatility to be quantified and predicted.
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External Links
The Greeks: What They Are and How to Use Themhttps://www.thinkorswim.com/tos/displayPage.tos?webpage=lessonGreeks
ThinkOrSwim guide to The Greeks.
View ThinkOrSwim in Options Market Glossary Directory
Vega (The Options Guide)http://www.theoptionsguide.com/vega.aspx
Options Guide article on vega.
View Options Guide Strategy Finder in Options Market Glossary Directory
Vega Definitionhttp://www.investopedia.com/terms/v/vega.asp
A definition of vega from Investopedia
What is option vega?http://www.volcube.com/resources/options-articles/what-is-option-vega/
Article explaining the significance of vega from volcube.com
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