Loading the player...

What is 'Vega'

Vega is 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 implied 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 lower order Greek that is not represented by a Greek letter.

Differences Between Greeks

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 an option's sensitivity to the underlying instrument's price. Gamma measures the sensitivity of an option's delta in response to price changes in the underlying instrument. Theta measures the time decay of the option. Rho measures an option's sensitivity to a change in interest rates.

Implied Volatility

As stated previously, vega measures the theoretical price change for each percentage point move in implied volatility. Implied volatility is calculated using an options pricing model and determines what the current market prices are estimating an underlying asset's future volatility to be. However, the implied volatility may deviate from the realized future volatility.

Vega Example

The vega could be used to determine whether an option is cheap or expensive. If the vega of an option is greater than the bid-ask spread, then the options are said to offer a competitive spread, and the opposite is true. For example, assume hypothetical stock ABC is trading at $50 per share in January and a February $52.50 call option has a bid price of $1.50 and an ask price of $1.55. Assume that the vega of the option is 0.25 and the implied volatility is 30%. Therefore, the call options are offering a competitive market. If the implied volatility increases to 31%, then the option's bid price and ask price should increase to $1.75 and $1.80, respectively. If the implied volatility decreased by 5%, then the bid price and ask price should theoretically drop to 25 cents and 30 cents, respectively.

  1. Theta

    A measure of the rate of decline in the value of an option due ...
  2. Vomma

    Vomma is the rate at which the vega of an option will react to ...
  3. Calendar Spread

    A calendar spread is a low-risk, directionally neutral options ...
  4. Gamma Neutral

    A method of managing risk in options trading by establishing ...
  5. Speed

    The rate at which the gamma of an option or warrant will change ...
  6. Change

    For an options or futures contract, change is the difference ...
Related Articles
  1. Trading

    Getting To Know The "Greeks"

    Understanding price influences on options positions requires learning about delta, theta, vega and gamma.
  2. Trading

    The Anatomy of Options

    Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio.
  3. Trading

    An Option Strategy for Trading Market Bottoms

    A reverse calendar spread offers a low-risk trading setup with profit potential in both directions.
  4. Trading

    Implied vs. Historical Volatility: The Main Differences

    Discover the differences between historical and implied volatility, and how the two metrics can determine whether options sellers or buyers have the advantage.
  5. Trading

    Stock Options: What's Price Got To Do With It?

    A thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price.
  1. What does negative vega mean for credit spreads?

    Learn about the option Greek vega, credit spreads and how vega affects the values of option credit spreads when volatility ... Read Answer >>
  2. How does implied volatility impact the pricing of options?

    Learn about two specific volatility types associated with options and how implied volatility can impact the pricing of options. Read Answer >>
  3. What is the relationship between implied volatility and the volatility skew?

    Learn what the relationship is between implied volatility and the volatility skew, and see how implied volatility impacts ... Read Answer >>
  4. How is implied volatility for options impacted by a bearish market?

    Learn why implied volatility for option prices increases during bear markets, and learn about the different models for pricing ... Read Answer >>
  5. How is implied volatility used in the Black-Scholes formula?

    Learn how implied volatility is used in the Black-Scholes option pricing model, and understand the meaning of the volatility ... Read Answer >>
  6. How are Bollinger Bands® used in options trading?

    Use Bollinger Bands to identify volatility changes and place options trades at the right time; profit in bull or bear markets ... Read Answer >>
Hot Definitions
  1. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  2. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  3. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  4. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  5. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center