Please use a real-life example to explore the following: When is Vega the highest –in the...
Please use a real-life example to explore the following: When is Vega the highest –in the money, out of the money, or near the money? Why do you think this is the case?
Homework Answers
Vega measures the sensitivity of the price of the option to a change in the implied volatility of the underlying asset. Vega is the amount by which the price of the option would change in response to a percentage point change in the implied volatility of the underlying asset.
The following image, pulled from NASDAQ, shows option greeks for Alphabet Inc. (Goog), for call options maturing on April 18th, 2019. Assuming the current price to be $1042 per share, we can analyze the vega of in the money, out of the money and near the money call options.
The call option with strike price $ 1020 is in-the-money and has vega of 1.69, and
The call option with strike price $ 1055 is out-of-the-money and has vega of 1.81.
The call option with strike price $ 1040 is near-the-money and has vega of 1.72.
By examining this data we can say that vega for out of the money call option is the highest and that for in the money call option is relatively lower. This is because as option prices increase, implied volatility rises and hence vega rises.
It would be prudent to add that at the money options with a large number of days to maturity have the highest vega values as they are close to being worthless. Even a small change in implied volatility will change the option price drastically.
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