Trading Options in Turbulent Markets: Master Uncertainty through Active Volatility Management, 2nd Edition

Chapter 8

Price Explosion: Volatility and Option Vega

Vega—the only greek that isn’t represented by a real Greek letter—is an estimate of how much the theoretical value of an option changes when volatility changes 1 percent. Higher volatility means higher options prices. Why? Higher volatility results in a greater price swing in the underlying asset price, which translates into a greater likelihood for an option to be profitable by expiration. Lower volatility signifies lower options prices, for the inverse reason: Lower volatility implies a smaller swing in the underlying asset price, translating into less likelihood that the option will be profitable by its expiration date.

Long calls and long puts always have positive vega. Short calls and ...