What is Vega? Vega is a measure of how much the price of an option will change in relation to a change in the volatility of the underlying asset. Vega is often expressed as a decimal, and represents the change in the value of an option for every 1% change in volatility.
For example, if an option has a vega of 0.05, that means that for every 1% increase in volatility, the option's price will increase by $0.05. Conversely, for every 1% decrease in volatility, the option's price will decrease by $0.05.
Vega is particularly important for options traders because volatility is a key driver of option prices. Higher volatility means that the underlying asset is more volatile, which in turn means that the option has a greater chance of expiring in-the-money. As a result, options with higher volatility will generally be more expensive.
Vega is also important for managing a volatility neutral position, as it measures the rate of change of volatility, it helps traders to adjust their positions accordingly to keep them volatility neutral.
Vega is not constant, it changes as the underlying price changes, volatility changes and time passes. It is highest for at-the-money options and decreases as the options goes further in or out of the money. The time to expiration also affects vega, as the vega of an option decreases as the time to expiration gets closer.
In summary, Vega is a measure of how much the price of an option will change in relation to a change in the volatility of the underlying asset. It is important for options traders to understand and monitor Vega when managing their positions, as volatility is a key driver of option prices.
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