What is Vega?
Vega is a variable that is used for measuring the changes between the price of an options contract and volatility changes for that particular asset. Vega options state the change in value for each percentage in the IV i.e. Implied Volatility.
It is the fourth option Greeks term among Delta, Gamma, Theta, Vega, and Rho respectively. Vega is related to the extraneous value of an option.
Vega is nothing but inflation and deflation in the option prices. It is directly associated with the options prices, that is the rise in options price leads to a rise in the value of Vega and vice versa.
This variable mostly stands in the favour of options buyers. They can always take the advantage of Vega Options with the right market insights. The option seller has to be a bit cautious while dealing with Vega in Options Greek.
For Understanding options, one must know what parameter is used to measure the values, isn’t it? So basically we use the Implied Volatility (IV) parameter for Options Greeks in the options contract. The word ‘implied’ itself suggests that it is a futuristic assumption of market volatility.
Implied Volatility is one of the ways to calculate the Vega option.
Now let us have a look at the 5 variables of options Greeks-
There are 5 main Greek variables mainly taken from Greek alphabets that we use in options contracts for trading;
Delta (Δ): Delta states the price sensitivity of the options of that underlying asset.
Gamma (Γ): Gamma shows the changing value of Delta relative to the change in price.
Theta (Θ): Theta represents the amount of time duration in an options price before the expiration.
Vega (v): It states the change in options price to volatility.
Rho (p): Price sensitivity to the interest rates is Rho.
Importance of Vega-
Vega mostly happens to bend in the favour of options buyers and they can take advantage by understanding options. Whereas options sellers have to be a little cautious. They can still claim it by proper monitoring and analysis.
Vega option can help you predict the rise and fall in the market despite its volatile nature.
Whenever we say Vega is rising it simply means that options price is also rising of that certain underlying asset.
When we take a glance at the past, Vega in options Greek has always risen whenever some event like RBI regulatory policy or a budget introduction happens. This happens because uncertainty in the market rises all over. Similarly in the other scenario after a covid outbreak, there was a downfall in the India VIX.
Vega option tends to remain unchanged generally in weekly expiration whereas it reflects much difference on monthly expiration dates.
Understanding Vega with an example-
Consider that there is a grand sales in your nearby city mall, now automatically the level of people visiting this mall will rise which would lead to fluctuations in the supply level of those stores.
Similarly, when the market predicts a rise in options price there is a boost in the uncertainties. The Vega option gives prediction with its parameter.
Amongst all five options Greek, the Vega option can be used to state the relationship between options price and volatility changes. As Vega is always in the favor of options buyers they must hit this to the correct note whereas an options buyer must take all the necessary precautions before making the move. Despite Vega being a good option one should be a little better hand before dealing with an Options Contract.