I’ve read a few option books.
THANKS... This is probably the most comprehensive "greeks" article/book I’ve read.

Wonderful blog. …..
A wonder wealth of knowledge there. Thanks so much for your kindness in publishing it!

Thank you very much for the most concise and simplest option intro. Highly recommended.

So far, yours is the best blog/site on basic options notes in the web that I have chanced upon.

Sunday, April 7, 2013

Effects of IMPLIED VOLATILITY (IV) on Option Greek VEGA – With Past DATA and CHARTS

The following is the behavior of Vega in relation to Implied Volatility (IV) changes:

Vega is higher when volatility increases, particularly for ITM and OTM options.
However, Vega is relatively stable / unchanged for ATM option.

We’ll use the same past actual data as shown in the previous post on the behavior of Delta, namely:
Options Chain for Call options of RIMM as at 3 Sep 2010, when the closing price is $44.78 and Implied Volatility (IV) is 54.05, for expiration month of Sep 2010 (10 days to expiration), October 2010 (38 days to expiration) and Dec 2010 (101 days to expiration).

Here is the summary of Vega values for different IV:


 From the table, we can see that for ITM options (e.g. option’s strike price $35 and $37.5) and OTM options (e.g. option’s strike price $55 and $52.5), Vega increases as IV increases , i.e. as it moves from the left (IV = 25, the lowest IV in this example) to the right (IV = 85, the highest IV in this example).

On the other hand, for near ATM options (i.e. the option’s strike price $45.00, because the stock price is $44.78), Vega is relatively unchanged with the change in IV.

Hence, these observations are in line with the statement above.

Now, let’s study the behavior of Vega of different IV at various strike prices (as shown in the chart below).


As can be seen in the chart:

For all the three options with different IV, Vega always behaves the same way, i.e. Vega of ATM options is always higher, and it gets lower as it moves towards deep ITM and deep OTM options.
However, the decrease in Vega as the option moves from ATM towards deep ITM/OTM will be greater for options with lower IV as compared to options with higher IV.

For deep ITM and deep OTM options, Vega is very small (close to zero) when IV is low. 


To view the list of all the series of articles in this topic, please refer to: 

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