Vega Greek

Term explanation

The Vega Greek indicates how much an option is affected by changes in implied volatility.

It is the change in the option’s price for a one-point change in implied volatility. For simplicity's sake, traders typically omit the decimal when discussing volatility. Volatility of 14%, for instance, is often abbreviated as "vol at 14."

Never confuse volatility with Vega. The historical or anticipated bounciness of the underlying future is what we mean when we talk about volatility. Volatility in the past, or historical volatility, is a known quantity. Expected volatility is unknown volatility in the futures contract that feeds into the option price as implied volatility.

Vega, on the other hand, measures how much an option is affected by shifts in implied volatility.

If an option's value is 7.50, implied volatility is 20, and its Vega is .12, that option has the following characteristics:

Let's pretend the implied volatility increases from 20 to 21.5. The new level of volatility is 1.5 levels higher. The option price will increase by 1.5 x .12 = .18 to 7.68.