How Is the Concept of “Vega” Related to Implied Volatility?
Vega is an option Greek that measures the sensitivity of an option's price to a 1% change in implied volatility (IV). Since IV is a direct input into the option pricing model, Vega quantifies how much the option's price will change if the market's expectation of future volatility shifts.
Naked option writers have negative Vega, meaning their position loses value if IV rises.
Glossar
Implied Volatility
Expectation ⎊ This value represents the market's consensus forecast of future asset price fluctuation, derived by reversing option pricing models using current market premiums.
Positive Vega
Volatility ⎊ Positive Vega describes an options position where the value increases as implied volatility rises.
Vega
Sensitivity ⎊ Vega, within the context of cryptocurrency options and financial derivatives, quantifies the rate of change in an option’s price with respect to changes in the underlying asset’s implied volatility.
Naked Option Writer
Exposure ⎊ A naked option writer, within cryptocurrency derivatives, assumes unlimited risk by selling options contracts without holding the underlying asset or a corresponding offsetting position.
Option Pricing
Derivatives ⎊ Option pricing is the mathematical process of determining the fair theoretical value of a derivative contract, such as a call or put, based on inputs like the underlying asset price, time to expiration, volatility, and prevailing interest rates.