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What is option vega?
Learn how vega estimates an option's sensitivity to a change in implied volatility
Prepared by Mark · Primary sources below
Direct answer
Vega estimates how much an option's theoretical value may change when implied volatility changes by one percentage point, while other model inputs are held constant. It does not predict whether implied volatility will rise or fall. Vega commonly differs across strikes and expirations, so two options on the same stock can react differently to the same implied-volatility change
It isolates one pricing input
Implied volatility is embedded in an option's market price. Vega estimates the theoretical effect of changing that input by one point while the stock price, time, and other model inputs remain unchanged
The same volatility move can affect contracts differently
Options with different strikes or expirations can have different vegas. Comparing only the implied-volatility number misses how much each individual premium may be sensitive to a change
Events make the distinction visible
Before a scheduled event, implied volatility can rise as uncertainty is priced in. After the event, a fall in implied volatility can reduce a long option's value even when the stock direction was favorable
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