Vega is a measure of the sensitivity of the option price to the volatility of the underlying asset.
It is expressed as the amount of money an option will gain or lose, with a 1% increase or decrease in volatility.
The higher the volatility, the higher is the value of the option. For example, an option with a 0.25 vega will gain 0.25% in value for 1% increase in the volatility of the underlying asset.
It is represented as follows:
All long options have positive vegas.
Vega is also called kappa, omega, tau, zeta, and sigma prime.
Vega can be an important Greek to monitor, especially in volatile markets since some of the option strategies can be very sensitive to changes in volatility. One such strategy is an option strangle, whose value is extremely dependent on changes to volatility.
Vega is calculated using the following formula: