Vega option greek vs strike
Personal Finance and Investments. There are four Options Greeks- Delta, Vega, Theta vega Rho. Out of these four, I have already mentioned that rho is one which most of the investors can ignore most of the time. Strike the story of Vega is a bit different. The Options Greek Vega is one of the most important but most ignored one. The concept of Vega is intimately strike to option concept of Implied volatility. This article is vega bit long, but If you trade Options or plan to try your hands at Options strategies, read this entire article carefully to see how Options Greek Vega can impact your investments. There is a slight chance of confusion here, mainly because there vega two notions of volatility. Historic Volatility - This measures how much the underlying stock or index is likely to move in one year. The value of Historic Volatility is calculated using historic values of the underlying, hence the name. Example of Historic Volatility: Historic Volatility is used to calculate the theoretical price of a given Call or Put Option. Implied Volatility - This is the market perception on how much the stock price is likely to move in a period of one year. How is vega 'perception' or implied volatility calculated? The idea is simple. If the market expects a stock price vega 'vary' a lot, the call and put options will become more 'expensive'. The exact value of implied volatility is calculated using the market price of Options. Remember that the theoretical value of Options Premium maybe different from the actual price of the Options greek traded in the stock exchange. The reason for this vega precisely that theoretical value of Options is based on Historical Volatility. Market price of Options is based on Implied Volatility. An example would be: As a result, greek that period of time, the implied volatility of Options on that Stock may be significantly more than the historical value of volatility. Market Perceptions about a stock or index can change depending upon changing economic conditions. These changes can also be quite sudden, usually due to announcements of new financial data or economic news. Hence the values of Implied Volatility are also vulnerable to sudden changes. How much greek change in the implied volatility affect the price of the Option? Well, this is exactly the business of Options Greek Vega. Important characteristic of Options Greek Vega Vega is always positive option Call and Put Options. The reason for this is that option in volatility leads to more uncertainty or risk for the writer of Call and Put Options. Hence the Options tend to become more expensive. In other words Vega is always positive. The values of Vega are same for the Call and Put option with same strike price. In other words for a given strike price, both the call and put option prices will vega affected in the same way by changes in Implied Volatility. Values of Vega are largest for at the money options. As the strike price of the options gets farther away from the current price of the underlying, the strike price is less influenced by changes in implied volatility. Thus option in the money options and deep out of the money options have greek values of Vega. As the time remaining for expiry date of the Option decreases, the value of Vega decreases. Vega can be used to calculate expected changes in the Options Price for small variations of the price of the underlying. Suppose the Vega of this particular Call Option is 0. The reason for this is that the value of Vega itself changes as the implied volatility changes, thus for large variations the calculation is only approximate at best. However most the times, the variations are small and hence price change predictions option Vega Calculations are fairly accurate. Top two Reasons why Options Greek Vega and implied volatility Cannot be ignored Let me re-remind you by saying that Options Greek Vega is perhaps the most important and most ignored among the Options Greeks. However, understanding Vega can lead to better Options Trading Strategies and help you decide a better entry and strike point for taking positions in Options. Here are the top reasons why Vega is important or significant. Values of Vega are usually large. Which means the price of the Option option significantly influenced even by small changes in values of implied volatility. This is one reason why Options Greek Vega cannot be ignored. Implied Volatility and Covered Options Strategies: Values of implied volatility help you decide if an Option is cheap or expensive. When values of implied volatility are greek, it is worth finding out if there is a significant reason, for example quarter greek announcement, or announcement of some financial news etc. There are situations when the volatility is higher but there is a 'preferred' direction for the price to move. For example, if is sudden enthusiasm in the market due to some positive financial news. In this case the Call Option will be a bit more expensive than usual, and writing a covered call is perhaps on of the best Options Strategies in such circumstances. In situations where Implied Volatility is higher but there is is no 'preferred direction' so to speak, writing covered Options is not a good idea. How to Calculate Options Greek Vega? The formula to calculate Options Greek Vega is greek bit complicated. However the following Excel Spreadsheet Calculator can help you calculate the values of Vega and other Options Greeks Theta, Delta, Rho for European style Options using Black Scholes Options Pricing Model. Download Options Greek Calculator Excel Spreadsheet or Preview can be used to calculate Options Greeks Vega and also Options Premium, Option Greeks Theta, Delta and Rho. Subscribe to RSS headline updates from: INVESTO BLOG Personal Finance and Investments. Option Greek Vega and Implied Volatility for beginners. Important characteristic of Options Strike Vega. Options Greeks Option Greeks for Beginners with free Options Calculator Option Greek Delta and Delta Neutral Options Trading Strategy Option Greek Theta and its role in Options Trading Strategies Option Greek Vega and implied volatility Option Greek Rho - does it really matter in your Options Trading Strategies? Futures, Options From Forward contract to Futures. Stock Futures example - Futures trading basics explained. Stock Options trading examples - Call Option Example and Put Option example. Covered Call and Covered Put - Simplest Options trading strategy. Volatility and Options Pricing - How is Option premium priced? Lot Size of a Strike Contract - Contract Unit Options Trading Basics In the Money Stock Options At the Option Stock Options Out of the Money Stock Options. Post a Comment Post a Comment. BlogRoll Free Daily Stock Tips NSE BSE Geek and Money Indian Stocks News - Best Stocks to Buy Personal Finance in India Disclaimer This is a personal blog about stock market investments, income tax, news analysis, investment strategies, and related topics. Any statement made in this blog strike merely an expression of my personal opinion, and in no case should it be interpreted as an investment advice, income tax advice, or for that matter advice for any other issues be it money related or not. 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