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Vega
An option's vega is a measure of the impact of changes in the underlying volatility (i.e. Vol) of the option price. The vega of an option expresses the change in the price of the option for every 1% change in underlying vol.
Options tend to be more expensive when vol is higher. So, when vol goes up, the price of the option goes up and when vol drops, the price of the option also falls in tandem. When you calculate the new option price due to a change in vol you add the vega when vol goes up. Subtract it when the vol falls.
For example, let's assume the following: Stock X is trading at $46 in OCT and a NOV 50 call is selling for $3.00. Additionally, the vega of the option is 0.15 and that the underlying vol is 25%.
If the underlying vol increased by 1% to 26%, then the price of the option should rise to $3 + 0.15 = $3.15.
However, if the vol had gone down by 2% to 23% instead, then the option price should drop to $3 - (3 x 0.15) = $2.55
The complexity of the actual calculation of vega goes further into the Black-Scholes Model.
Regards,
Boodleboy322
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