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Okoora infrastructure Glossary

Understand core FX, risk, and execution concepts used across Okoora’s infrastructure.

Vega

What Is Vega?

Vega is an options Greek that measures an option’s price sensitivity to changes in implied volatility. It represents the amount by which the price of an option is expected to change for a 1% change in implied volatility, with all other variables held constant.

How It Works

Vega reflects the impact of market sentiment and volatility expectations on an option’s premium. When implied volatility rises, option prices increase; when it falls, option prices decline. Vega is always positive for long options (buyers benefit from rising volatility) and negative for short options (sellers benefit from declining volatility).

Example

Suppose an at-the-money call option is priced at $3.50 with a Vega of 0.15. If implied volatility increases from 25% to 26%, the option price rises to $3.65. If volatility drops to 24%, the price decreases to $3.35. Before earnings announcements, options often carry high implied volatility—after the event, this can drop significantly, resulting in a volatility crush and price drop even if the stock doesn’t move.

Key Concepts / Components

  • Implied Volatility (IV): The expected future volatility reflected in option prices, directly influencing Vega-based price movements.
  • Volatility Smile/Skew: Describes how implied volatility varies across strikes and maturities, affecting Vega values.
  • Vega Exposure: The net Vega across a portfolio, used by traders and risk managers to assess volatility risk.
  • Historical Volatility: Realized volatility over a past period, often compared to IV to identify trading opportunities.
  • VIX (Volatility Index): A measure of expected market volatility derived from S&P 500 options, commonly used as a volatility benchmark.

When It’s Used

Vega is critical during events that could shift implied volatility—earnings, central bank decisions, or geopolitical news. Traders structure strategies around Vega exposure, including volatility arbitrage and straddles, and risk managers use it for stress testing portfolios. High Vega positions are common in longer-dated, at-the-money options.

Related Terms

References

Virtual Bank AccountVanilla OptionVaR (Value at Risk)Volatility