Could someone please confirm the definition of vega?
Is it:
- If volatility goes up by 1%, then the option price of call/put goes up $38 (mentioned in notes)
- If volatility goes up by 1%, then the option price of call/put goes up $0.38 (mentioned in document sheet)
Vega refers to sensitivity of option price with respect to changes in implied volatility of the underlying asset.
For more explanation please attach the picture of notes and document sheet.
Done. Please check. I have uploaded the question from the PDF and the answer is B with the below solution.
7. B. If the volatility increases by 100 basis points from 20.0% to 21.0%, then the price of the option
will increase by approximately $0.3820 = +1.0% change in vol * $38.20 price/change in vol
Vega is approximate (first partial derivative) change in option price per one unit (100%) change in
volatility. A Vega of 38.2 implies a $38.20 change per 100%, such that a +1.0% change in volatility is
associated with a price change of 1.0% * $38.20 = $0.3820
In the solution they are saying that Vega refers to change in option price with respect to 1 unit change in volatility and they are taking one unit to be 100%. that’s why their correct answer is .3820 (i.e. 1% x 38.20).
But I think the correct answer should be “C”.
Please confirm it with someone else also.
If the option has a vega of 0.15, then for each % change in volatility, the option will gain or lose 0.15 in its theoretical value.