BROWSE

Vega

What is 'Vega'

Vega is the measurement of an option's sensitivity to changes in the volatility of the underlying asset. Vega represents the amount that an option contract's price changes in reaction to a 1% change in the implied volatility of the underlying asset. Volatility measures the amount and speed at which price moves up and down, and is often based on changes in recent, historical prices in a trading instrument.

Explaining 'Vega'

Vega changes when there are large price movements (increased volatility) in the underlying asset, and falls as the option approaches expiration. Vega is one of a group of Greeks used in options analysis and is the only lower order Greek that is not represented by a Greek letter.

Differences Between Greeks

One of the primary analysis techniques utilized in options trading is the Greeks – measurements of the risk involved in an options contract as it relates to certain underlying variables. Vega measures the sensitivity to the underlying instrument's volatility. Delta measures an option's sensitivity to the underlying instrument's price. Gamma measures the sensitivity of an option's delta in response to price changes in the underlying instrument. Theta measures the time decay of the option. Rho measures an option's sensitivity to a change in interest rates.

Implied Volatility

As stated previously, vega measures the theoretical price change for each percentage point move in implied volatility. Implied volatility is calculated using an options pricing model and determines what the current market prices are estimating an underlying asset's future volatility to be. However, the implied volatility may deviate from the realized future volatility.

Vega Example

The vega could be used to determine whether an option is cheap or expensive. If the vega of an option is greater than the bid-ask spread, then the options are said to offer a competitive spread, and the opposite is true. For example, assume hypothetical stock ABC is trading at $50 per share in January and a February $52.50 call option has a bid price of $1.50 and an ask price of $1.55. Assume that the vega of the option is 0.25 and the implied volatility is 30%. Therefore, the call options are offering a competitive market. If the implied volatility increases to 31%, then the option's bid price and ask price should increase to $1.75 and $1.80, respectively. If the implied volatility decreased by 5%, then the bid price and ask price should theoretically drop to 25 cents and 30 cents, respectively.


Further Reading


Vega-informed trading and options market reform
www.tandfonline.com [PDF]
… Information in the Index Options Market?” Finance Research Letters. doi:10.1016/j.frl.2018.10. 008.[Crossref] , [Google Scholar]). We analyze a high-quality microstructure dataset that includes detailed transaction and investor information to show that overall vega trading does …

Economics of ocean thermal energy conversion (OTEC): an updateEconomics of ocean thermal energy conversion (OTEC): an update
www.onepetro.org [PDF]
… Information in the Index Options Market?” Finance Research Letters. doi:10.1016/j.frl.2018.10. 008.[Crossref] , [Google Scholar]). We analyze a high-quality microstructure dataset that includes detailed transaction and investor information to show that overall vega trading does …

A review of textual analysis in economics and financeA review of textual analysis in economics and finance
www.igi-global.com [PDF]
… Information in the Index Options Market?” Finance Research Letters. doi:10.1016/j.frl.2018.10. 008.[Crossref] , [Google Scholar]). We analyze a high-quality microstructure dataset that includes detailed transaction and investor information to show that overall vega trading does …

Delta-hedging vega risk?Delta-hedging vega risk?
www.tandfonline.com [PDF]
… Information in the Index Options Market?” Finance Research Letters. doi:10.1016/j.frl.2018.10. 008.[Crossref] , [Google Scholar]). We analyze a high-quality microstructure dataset that includes detailed transaction and investor information to show that overall vega trading does …

The New Development FinanceThe New Development Finance
kb.osu.edu [PDF]
… Information in the Index Options Market?” Finance Research Letters. doi:10.1016/j.frl.2018.10. 008.[Crossref] , [Google Scholar]). We analyze a high-quality microstructure dataset that includes detailed transaction and investor information to show that overall vega trading does …

Principles of Regulation and Prudential Supervision: Should They Be Different for Microenterprise Finance Organizations?Principles of Regulation and Prudential Supervision: Should They Be Different for Microenterprise Finance Organizations?
kb.osu.edu [PDF]
… Information in the Index Options Market?” Finance Research Letters. doi:10.1016/j.frl.2018.10. 008.[Crossref] , [Google Scholar]). We analyze a high-quality microstructure dataset that includes detailed transaction and investor information to show that overall vega trading does …



Q&A About Vega


What is the organization's name?

The organization's name is Volunteers for Economic Growth Alliance (VEGA).

What are some other Greek measurements that can be used for options trading analysis?

Delta, Gamma, Theta and Rho are also Greek measurements that can be used for options trading analysis.

Where is VEGA headquartered?

VEGA headquarters are located in Washington D.C.

What does a typical project involve?

A typical project involves one or more member organizations working together on an economic development initiative.

Are all members US-based NGOs?

Yes, all members are US-based NGOs.

Who are some of the members of VEGA?

Some of the members include Center for International Private Enterprise, Council for a Community of Democracies, and Eurasia Foundation.

Why is it important to understand Vega?

It is important to understand Vega because it helps investors determine whether or not an option contract offers a competitive spread.

How many countries does each member have offices in?

Each member has offices in developing transitioning economies where USAID operates.

What is Vega?

Vega is the measurement of an option's sensitivity to changes in the volatility of the underlying asset.

Does each member have different specialties/focus areas they work in/with?

Yes, each member has different specialties/focus areas they work in/with.

What does USAID typically contract with VEGA to do?

USAID typically contracts with VEGA to do specific projects that involve one or more member organizations.

How do you calculate Vega?

You calculate Vega by multiplying the change in implied volatility by the option price.