Vega(κ) is the sensitivity of an option’s value to underlying volatility(σ). σ is one of the main drivers of change in an option’s value and so κ allows you to quantify this particular risk.
For example, a κ of 1178.50 when the model price is Rs.188.92 and σ is 0.185 implies that if σ rises by 1% to 0.195, then the price will increase to Rs.188.92 + 1178.50/100 = Rs.200.705
- κ increases as volatility increases
- κ for a long term option is higher than the κ for a shorter term option with the same strike
- an at-the-money option will have a greater κ than either an in-the-money option or an out-of-the-money option
- κ is the same value for calls and puts
Vega in action: March 2014 NIFTY Options since Jan
First, lets look at the underlying:
To capture the full move of the NIFTY, you’ll have to look at, at least, a dozen strikes between 5950 and 6900.
κ:
Related articles
- Forensics: NIFTY Options – Gamma(γ)
- Forensics: NIFTY Options – Delta(δ)
- Forensics: NIFTY Options – Theta(θ) Decay
- Forensics: NIFTY Options (stockviz.biz)
