Vega (ν)

The sensitivity of an option's price to a 1% change in implied volatility.

Vega measures the change in option value per 1% increase in volatility: ν = S·e^(−δT)·n(d₁)·√T / 100. Vega is always positive for long options (both calls and puts increase in value when vol rises). Vega is largest for ATM options with long time to expiry. Long options are 'long vega' — they profit if implied volatility rises. Portfolio vega must be hedged separately from delta/gamma since no underlying position has vega.

Formula

\nu = \frac{S e^{-\delta T} n(d_1) \sqrt{T}}{100}

Related Terms

Implied Volatility (IV)

The volatility that, when input into the BSM model, makes the model price equal to the market price of an option.

Delta (Δ)

The sensitivity of an option's price to a $1 change in the underlying spot price.

Gamma (Γ)

The rate of change of delta with respect to the spot price — the curvature of the option's value.

Black-Scholes-Merton Model (BSM)

The foundational option pricing formula that gives the fair value of a European call or put as a function of spot, strike, rate, volatility, and time.