Vega

What Is Vega?

Vega is a measure of how much the price of an option is expected to change for each one-percentage-point change in the implied volatility of its underlying asset. It is usually grouped with other option sensitivity measures called the Greeks, although "vega" is not a letter of the Greek alphabet. Vega shows how exposed an option's value is to shifts in market expectations about future price swings, rather than to movements in the underlying price itself.

How Vega Works

Vega is typically quoted in dollars per share for each one-point move in implied volatility. Options on assets expected to be more volatile tend to cost more, because the chance of a large price move before expiration is greater. When implied volatility rises, the value of both calls and puts generally rises. This is why buyers of options have positive vega and sellers have negative vega.

Several factors affect how large vega is:

• Options at the money, where the strike price is close to the current price, usually have the highest vega.
• Options with more time until expiration generally have higher vega than those close to expiring.
• Vega shrinks as expiration approaches, so the sensitivity fades over time.

Vega is an estimate for small changes. The actual effect can differ because the relationship between volatility and option price is not perfectly straight-line, and vega itself changes as prices and volatility move.

Example

Suppose a hypothetical call option trades at $3.00 with a vega of 0.12. If implied volatility rises by one percentage point and nothing else changes, the option price would be expected to increase by about $0.12, to roughly $3.12. If implied volatility falls by one point, the price would be expected to drop by a similar amount, all else being equal.

Why It Matters to Investors

Vega helps explain why an option can lose value even when the underlying stock moves in the expected direction. A drop in implied volatility, such as after a scheduled event like an earnings report has passed, can reduce an option's price. Investors who trade options use vega alongside other Greeks to understand the risks in their positions. This is an educational overview, not guidance on any particular trade.