Vega

Vega is an estimate of how much the theoretical value of an option changes when volatility changes 1.00%. Higher volatility means higher option prices. The reason for this is that higher volatility means a greater price swings in the stock price, which translates into a greater likelihood for an option to make money by expiration.

Long calls and long puts both always have positive vega. Short calls and short puts both always have negative vega. Stock has zero vega – it’s value is not affected by volatility. Positive vega means that the value of an option position increases when volatility increases, and decreases when volatility decreases. Negative vega means that the value of an option position decreases when volatility increases, and increases when volatility decreases.

Let’s look at the XYZ Aug 50 call again. It has a value of $2.00 and a vega of +.20 with the volatility of XYZ stock at 30.00%. If the volatility of XYZ rises to 31.00%, the value of the XYZ Aug 50 call will rise to $2.20. If the volatility of XYZ falls to 29.00%, the value of the XYZ Aug 50 call will drop to $1.80.

Vega is highest for ATM options, and is progressively lower as options are ITM and OTM. This means that the value of ATM options changes the most when the volatility changes. The vega of ATM options is higher when either volatility is higher or there are more days to expiration.

Position vega measures how much the value of a position changes when volatility changes 1.00%. Position vega is calculated much in the same way as position theta.