Vega (v) is one of the options greeks which are collectively used to determine how closely an options or warrants contract will track its underlying market. Specifically, vega is the rate at which the price of an options or warrants contract will change based upon changes in the volatility of its underlying market. Vega is an important options greek for certain options strategies (e.g. straddles), but is not used as often as delta or theta.
Note that vega is not actually a greek letter, so the greek letter Nu is used instead, and is often represented by a lowercase roman letter v.
Calculation
Vega (v) is the first derivative of the value (V) of an options or warrants contract, with respect to the volatility of the underlying market (σ). Vega is calculated as shown in the above calculation image.
Use In Trading
Vega (v) is the number of points by which the value of an options or warrants contract will increase or decrease, as the volatility of the underlying market increases or decreases by 1%. Vega can be either a positive or negative number depending upon the direction that the value will move compared to the direction of the change in volatiliy. For example, the price of a long put with a vega of 0.05 will increase by $0.05 (or € or £, etc.) for every increase of 1% in the volatility of the underlying market.
Vega is an important options greek for options strategies that make or lose money based upon volatility. For example, a long straddle will make a profit if its underlying market is highly volatile (i.e. if its price moves significantly in either direction), and is therefore sensitive to changes in the volatility of its underlying market.
