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Vega

In short

Sensitivity to implied volatility — how option price changes with volatility

Vega measures how much an option's price changes when market expectations of volatility change. If you expect a big announcement (earnings, FDA), buy before the event — vega will boost your option's value as uncertainty rises.

Vega measures option price sensitivity to a 1% change in implied volatility. Long options have positive vega (benefit from volatility increases). High vega means the option is very sensitive to changes in market uncertainty. Vega is highest for at-the-money options with more time to expiry.

Formula

Vega = ∂Option Price ÷ ∂Implied Volatility

Related concepts

  • Implied Volatility — Implied volatility is the market's guess about how much a stock will move. High IV means expensive options (the market expects big moves). Low IV means cheap options. Buy options when IV is low, sell when IV is high.
  • Delta — If a call has delta of 0.5, it gains $0.50 for every $1 the stock rises. Delta 1.0 means the option moves dollar-for-dollar with the stock. At-the-money options typically have delta near 0.5.
  • Gamma — Gamma measures how fast delta changes. High gamma means your option becomes more or less sensitive quickly as the stock moves. Near expiration, gamma is highest — small stock moves cause big swings in option value.
  • Theta — Options are like ice cubes that melt over time. Theta measures how fast value evaporates daily. An option with theta of -$0.05 loses $5 per day per contract, all else equal. Time is your enemy as an option buyer.