ATM Vega

Quantitative Finance Level 2

What can we say about the vega of an ATM option?

The vega is (greatly) increasing as volatility increases The vega is (greatly) decreasing as volatility increases The vega is (mostly) constant as volatility increases

1 solution

A Former Brilliant Member
Feb 15, 2015

The VEGA will stay a constant amount as long as an option remains ATM. However, once the stock price moves and the option is either ITM or OTM the Vega will be altered .

ITM - In the money .

OTM - Out of the money .

Calvin Lin sir, I have read this information on the Internet . Can you please provide a more complete answer ?

Thanks for the same :)

What is the reason / understanding that "vega will stay a constant amount as long as an option remains ATM"?

Calvin Lin Staff - 6 years, 3 months ago

Exactly sir, I just read the statement in question online, but don't understand the meaning .

If you want,sir, I can delete my answer.

P.S. I read it from here .

A Former Brilliant Member - 6 years, 3 months ago

Run a piece of analysis on BS Model, and please let me know what you see with Vega vs Vol, ATM. I see Vega first go up as vol increases and then starts slowly going down.

Yang Yang - 5 years, 4 months ago

The vega should be pretty constant, which follows from the straddle approximation formula .

It will eventually decrease at high volatility (much higher than we're practically concerned with), where the straddle approximation formula is no longer accurate.

Calvin Lin Staff - 5 years, 4 months ago

When doing Taylor expansion on N(d_{1,2}), it transformed a non-linear relationship to a linear relationship between price and vol. Usually it's not advised to calculate greek for ATM options with the BS ATM approx, because of the example I have just given. Vega is okayish, delta would be completely wrong. From a simple test script I run, vega is definitely not constant.

Yang Yang - 5 years, 4 months ago

ATM Vega

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