Option Vega

What is vega in options?

Vega is how much an option's price changes when its implied volatility changes by 1 percentage point - for example from 25% to 26% - with the stock price and time unchanged. A vega of 0.23 means the option gains about 23 cents a share ($23 a contract) if implied volatility rises 1 point, and loses about that much if it falls 1 point.

• Long calls and long puts both have positive vega: a rise in implied volatility usually makes both calls and puts more valuable, and a drop in implied volatility usually makes both lose value.
• Short options have negative vega: the seller gains when implied volatility falls.
• Vega is largest for at-the-money options and grows with the time left to expiration.

How implied volatility moves option prices

Implied volatility is the amount of future movement built into an option's price. More expected movement means a wider range of outcomes, and since an option's loss is capped at its premium while its upside is not, a wider range makes both calls and puts worth more. Vega turns a change in implied volatility into dollars.

Vega grows with time: a long-dated option has more time for that extra volatility to matter, so its price is far more sensitive to implied volatility than a short-dated one. Near expiration the reverse holds - short-dated options have little vega but a lot of gamma, so they react more to the stock's moves than to changes in implied volatility.

Worked example: implied volatility up, and an earnings IV crush

Volatility rises. The stock is at $200 and the 30-day 200-strike call costs $6.04 at an implied volatility of 25%, with a vega of 0.23. If implied volatility rises to 30% with the stock unchanged, the call gains about 5 × 0.23 = $1.14, to about $7.18. The 200-strike put, at $5.39, gains about the same $1.14, to $6.53. If implied volatility falls to 20% instead, both lose about $1.14.

Earnings IV crush. Before an earnings report, a 7-day at-the-money call on the same $200 stock trades at an implied volatility of 60% for $6.70, with a vega of 0.11. After the report implied volatility drops to 35%. Even with the stock back at $200, the drop alone takes about 25 × 0.11 = $2.75 off the call, leaving it near $3.94. The put loses in the same way. This is why buying options before earnings can lose money even when the stock moves: the move has to be large enough to make up for the fall in implied volatility. How earnings move option prices

Per-share prices from a standard pricing model with a 4% interest rate and no dividends. Vega itself changes as the stock moves and time passes.

What you can find out

Where you see vega on Market Chameleon

• Option chain. On a stock's page choose Options › Option Chain and switch the outside column on either side from Delta to Vega. Each row also shows the Bid IV and Ask IV - the implied volatility in the bid and the ask price. How to read the chain
• Covered Calls and Naked Puts screeners. The Option Greeks & Volatility tab shows each option's vega and other Greeks, its implied volatility, and how that implied volatility compares with the stock's 20-day and 1-year historical volatility. Menu: Screeners › For Premium Users › Single-Leg Strategies, or open the Covered Calls or Naked Puts screener. Premium and Premium Options members see the full list; everyone else sees the first 10 rows.
• Implied Volatility Rankings. Menu: Options › Implied Volatility Rankings: IV30, its % Rank and 52-week position, and the stock's 20-day and 1-year historical volatility.

Our vega is per 1 point of implied volatility, from the same pricing model as our implied volatility. How we calculate it

FAQ

Is vega per 1% or per 1 point of volatility?

Per 1 percentage point of implied volatility, such as 25% to 26% - not a 1% relative change. On Market Chameleon vega is per share; multiply by 100 for one contract.

Why did my option lose value when the stock moved my way?

Often because implied volatility fell, as it usually does after an earnings report. Vega times the drop in implied volatility can outweigh what the stock's move added.

Do calls and puts have the same vega?

In standard pricing models a call and a put with the same strike and expiration have the same vega, so a change in implied volatility moves both by about the same amount.

How does Market Chameleon calculate vega?

From our binomial pricing model, as the change in an option's value when its midpoint implied volatility rises 1 point, per share.