Vega

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DEFINITION of 'Vega'

The measurement of an option's sensitivity to changes in the volatility of the underlying asset. Vega represents the amount that an option contract's price changes in reaction to a 1% change in the volatility of the underlying asset. Volatility measures the amount and speed at which price moves up and down, and is often based on changes in recent, historical prices in a trading instrument. Vega changes when there are large price movements (increased volatility) in the underlying asset, and falls as the option approaches expiration. Vega is one of a group of Greeks used in options analysis, and is the only one not represented by a Greek letter.

BREAKING DOWN 'Vega'

One of the primary analysis techniques utilized in options trading is the Greeks – measurements of the risk involved in an options contract as it relates to certain underlying variables. Vega measures the sensitivity to the underlying instrument's volatility. Delta measures the sensitivity to the underlying instrument's price. Gamma measures the sensitivity of delta in response to price changes in the underlying instrument. Theta measures the time decay of the option.

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RELATED FAQS
  1. What does negative vega mean for credit spreads?

    Greek vega measures an option's sensitivity with respect to a change in the underlying asset's volatility. The vega of an ... Read Full Answer >>
  2. How are Bollinger Bands® used in options trading?

    Option pricing is influenced by intrinsic value, which is the underlying stock's price, and extrinsic value, which is comprised ... Read Full Answer >>
  3. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  4. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
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    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
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