Vega — Concept Explainer Video

Transcript

Volatility can move the option

Vega estimates how option value responds to a change in implied volatility, with other inputs fixed. Think of it as sensitivity to the uncertainty priced into the contract. Both a call and a put can gain when implied volatility rises.

Use percentage points

Suppose vega is fifteen cents per volatility percentage point. Implied volatility rises from twenty to twenty two percent. That is a two point change, so the local estimate is thirty cents more per share, or thirty dollars for a one hundred multiplier.

Long and short exposures

Long vanilla calls and puts generally have positive vega. Selling those options reverses the sign. Longer dated options often have more vega than comparable shorter dated options, but the exact sensitivity depends on the contract and model inputs.

When uncertainty disappears

After earnings or another anticipated event, implied volatility may fall. That can reduce an option value even if the stock moved in the buyer's expected direction. The actual outcome combines delta, volatility changes, time decay, and other effects.

A sensitivity, not a forecast

Vega does not predict the next volatility level. It helps compare scenarios. Keep the percentage point convention clear, multiply by signed position size, and remember that vega itself changes as the underlying and remaining time change.