Vega (option).

In plain English

Vega measures an option's sensitivity to implied volatility, the market's estimate of how much the underlying stock will swing before the option expires. Higher implied volatility raises the price of both calls and puts, because a wider range of outcomes makes an option more likely to finish valuable. Vega is largest for options with plenty of time left and strikes near the current price. It shrinks toward zero as expiration approaches. Two options on the same stock at the same strike can trade at very different prices purely because expectations about future movement changed.

01Why it matters

Vega explains why an option can lose value on news that turned out well, since the uncertainty that supported the price disappeared once the event passed.

02The math, step by step

An option trades at 5.00 with a vega of 0.20. Implied volatility drops 4 points after an earnings release. The option loses about 4 times 0.20, or 0.80, falling to 4.20 even if the stock closes unchanged.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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