The VEGA              

VEGA

How much does the option price change if the volatility of the stock is changing by a small amount (e.g. 0.5 %) per year?

You own a CALL option for one share of some blue chip stock - blue chips have comparatively small volatilities. Right now the volatility is 15% per year. The option has a value of $4.50. Assume that just now the volatility (the size of the random stock fluctuations) is picking up by 1% per year to 16% per year - strike price, stock price, interest rate stay unchanged. The value of the option for the new volatility is $5. The Vega for the stock option is the difference in option price: $5.00 - $4.50 = $0.50 divided by the change in volatility: 16% - 15% = 1% = 1/100 = 0.01   Vega = $0.50 / 0.01 = 50

As with r this value for Vega assumes that you state option prices in Dollars and use annual volatilities. The  Vega  tells you by how much the option price changes if the market gets more (or less) jittery. To understand how  Vega  depends on stock and strike price, interest rate and other quantities check out the OPTIONATOR! again.

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