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The vega of an option is one of the four primary “option greeks.” The other three are delta, theta, and vega.
An option’s vega is an estimation of how much the option’s price will change relative to a 1% change in implied volatility.
But vega is tricky to explain because implied volatility does not change magically. Implied volatility measures the amount of extrinsic value in a stock’s options relative to the time left until expiration.
For implied volatility to change, the option prices much change first.
To understand vega, I like to explain it is the extrinsic value change that will result in an approximate 1% change in implied volatility, assuming the stock price does not change and barely any time passes.
In this video, I explain vega in-depth through numerous examples, as well as showing you what “position vega” represents and what it tells you about an entire option position.
I also explain why longer-term options have more vega exposure than shorter-term options, and why that may not matter as much as you think.
Be sure to leave a comment down below with any questions you may have!
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