The VEGA
VEGA


How much does the option price change if the volatility of the stock
is changing by a small amount (e.g. 0.5 %) per year?

 

You own a CALL option for one share of some blue chip stock  blue chips
have comparatively small
volatilities.
Right now the volatility is
15% per year. The
option has a value of $4.50. Assume that just now the volatility
(the size of the random stock fluctuations) is picking up by 1% per year to 16%
per year 
strike price, stock price, interest rate stay unchanged.
The value of the option for the new volatility is $5.
The Vega for the stock option is
the difference in option price:
$5.00  $4.50 = $0.50
divided by
the
change in volatility: 16%  15% = 1% = 1/100 = 0.01
Vega = $0.50 / 0.01 = 50

As with r this value for Vega assumes that you state option prices in Dollars and
use annual volatilities.
The Vega tells you by how much the option price changes if
the market gets more (or less) jittery. To understand how Vega
depends on stock and strike price, interest rate and other quantities check out the
OPTIONATOR! again.
Another greek ...
