Using Vega to find Option Price Changes
Quantitative Finance
Level
1
The call option on the 49 strike is currently worth $4.50 and has a vega of 0.11.
How much would the call option be worth if volatility increases by 5%?
$3.95
$4.50
$5.05
$5.60
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Vega is the measurement of an option's sensitivity to changes in the volatility of the underlying asset. Vega ν represents the amount that an option contract's price V changes in reaction to a 1% change in the volatility σ of the underlying asset (see Definition of 'Vega' by Investopedia ).
Therefore the difference in option price due to 5 % increase in volatility:
Δ V = ν Δ σ = 0 . 1 1 × 5 = 0 . 5 5
Therefore, the new option price = $ 4 . 5 0 + $ 0 . 5 5 = $ 5 . 0 5 .