Define the Term ‘Vega’ and Explain Its Relationship with Implied Volatility

Vega is an option Greek that measures the sensitivity of the option's price to a 1% change in implied volatility (IV). Implied volatility is the market's expectation of future price movement of the underlying asset, and Vega quantifies the risk associated with changes in this expectation.

A high Vega means the option price is very sensitive to changes in IV. Vega is highest for At-the-Money (ATM) and long-dated options.

All long option positions have positive Vega, meaning their value increases when IV rises.