This is a measure of the sensitivity of an option price to changes in market volatility. It is the change of an option premium for a given change – typically 1% – in the underlying volatility.
Change in an option premiumVega = -----------------------------------------
Change in volatility
If for example, XYZ stock has a volatility factor of 30% and the current premium is 3, a vega of .08 would indicate that the premium would increase to 3.08 if the volatility factor increased by 1% to 31%. As the stock becomes more volatile the changes in premium will increase in the same proportion. Vega measures the sensitivity of the premium to these changes in volatility.
What practical use is the vega to a trader? If a trader maintains a delta neutral position, then it is possible to trade options purely in terms of volatility – the trader is not exposed to changes in underlying prices.
For Stock advice: Saturday watch on Market Outlook
