volatility

Vega reflects an options sensitivity to changes in the implied volatility of the option. Vega is expressed as the change of the option's value as volatility rises or falls by 1%. Vega is negative for short options and positive for long options. For example, if the theoretical price of a long call option is 1.50 and the vega of the option is 0.30, then if the volatility increases from 15% to 16%, the theoretical price of the option will increase to 1.80. Conversely if the option is a short call the theoretical price will decrease to 1.20. An options vega decreases towards 0 as the option moves deeper In the money or farther out of the money. Vega also decreases as time goes by. An options vega will go towards 0 at expiration Vega affects an options extrinsic value (time value), not the intrinsic value.

Vega plots for long call

Vega plot for a call debit spread.

The graph on the left is an IV surface plot of Jul RUT puts from June 5 to Jul 12, sampled at approx. 11:40 AM during the trading day.

IV for RUT Calls June 5 2012

The graph to the left is an IV plot of RUT jul call options sampled at 5 minute intervals throughout the trading day. At the time RUT was trading between 733 and 746. Twenty strikes between 680 and 880 were used in this graph.IV for RUT Puts June 5 2012

The graph to the left is an IV plot of RUT jul put options sampled at 5 minute intervals throughout the trading day. At the time RUT was trading between 733 and 746. Twenty strikes between 680 and 880 were used in this graph.IV plot for AAPL Jul Puts

The graph to the left is an IV plot of Jul AAPL puts from June 5 to July 12, sampled at approx. 11:40 AM during the trading day.