DERIVATIVES  >>  GLOSSARY
 
Vega
Vega is the measure of an option’s sensitivity to changes in the volatility of the underlying asset.
Vega (sometimes known as kappa) is the change in option price given a one-percentage point (1%) change in volatility of the index or stock.

Call option     Change
Spot price 1,070 1,070 0
Exercise price 1,080 1,080 0
Interest 10% 10% 0
Volatility 25% 26% 1%
Time(days to expiry) 11 11 0
Vega 74.0963 Anticipated Change 0.7410
Option price 15.5275 16.2630 0.7356

In the example, when the volatility has been changed from 25.1% to 26.1% the price of the stock options has gone up by Rs 0.73. The value of Vega is 74.09, which means the price should go up by Rs 0.74 for every 1% increase in volatility.

It can also be interpreted as: if the volatility changes by a small amount, then the option value should change by 15.88 times that amount. If the volatility increased by 0.01 (from 25.1% to 26.1%), then the option value should change by 74.09*.01 = 0.7409.

The value of Vega is same for put and call options.