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These classes are all based on the book Trading and Pricing Financial Derivatives, available on Amazon at this link.

Hello youtube and youtubers we are back to learn more about the greeks in options and today’s video is all about vega now i always have to apologize at this point when i teach the class i often i teach derivatives class in london at king’s college london and also at queen mary university and i always have to apologize to any confused looking greek people who are

Sitting in my classroom scratching their heads and saying patrick what is this there’s there’s no greek letter called vega and that is true it is not a letter of the greek alphabet at all the name vega was probably adopted because the greek letter nu looks a lot like the latin letter v and vega rhymes with the american pronunciation of beta and theta and so so it

Was decided to name the greek that relates to volatility as vega rather knew and so that’s that’s where we are so anyhow moving on from that this is our sixth video in a series on the greeks for options investors and if you want to watch the others i’ll put a link to a playlist above and you should check that out so what is vega it measures the sensitivity of

Option prices to changes in the volatility of the underlying and by the volatility of the underlying i of course mean implied volatility the expected volatility of the underlying over the life of the option so vega is the first derivative of the black scholes options price taken with respect to volatility or sigma which is of course standard deviation one of the

Core black scholes assumptions is that volatility stays constant over time and over the life of the option in the real world of course that does not happen and what vega does is it shows us how options will change in value when the volatility expectation the implied volatility that we’re using and pricing them changes so vega is usually expressed as the change in an

Options value as volatility rises or falls by one percent all long options positions both calls and puts will gain value with rising volatility so if you own options if you own puts our own calls if you bought options you are long volatility and you will make money when implied volatility increases and you will lose money when implied volatility falls your options

Will fall in value so positive vega then means that an options position increases in value when the underlying stock volatility increases and that the options will fall in value when the underlyings volatility decreases it’s often a little bit confusing at first at both puts and calls will increase in value with an increase in the underlying stocks volatility

But understanding this mechanism is probably the most important thing in understanding how options work at all this relationship is further explained in the upcoming video i have on dynamic hedging in fact i would argue that that chapter of my book and equally the hopefully the video that i’ll shoot in a few days on this topic is probably the most important and a

Concept for for options investors to understand so there’ll be one video on dynamic hedging and another one on volatility arbitrage now vega is one of the most important greeks that an options trader monitors especially when markets are volatile it matters a lot in fact if you go back to some of my videos on how we price options you can see how important volatility

Is and how i argued that actually the price of option of an option is really just down to its volatility well that under strike price in there are the price of down there lying but the prices of options can be really sensitive to changes in volatility especially with certain options combinations things like straddles and strangles and so really you know a lot of

What you have to think about when you’re buying and selling options is this volatility and hopefully in the upcoming videos it’ll become much more clear why why that really matters so much but anyhow that’s it for this video please hit the like button do subscribe if you want to see more and even hit the bell button next to the subscribe button if you want to be

Notified when my videos come out comment below if there are any questions you’d like to ask me or any topics that you think i should cover in these videos and they’re all based on my book which is called trading and pricing financial derivatives and there’s a link to that in the description below so have a great day and talk to you again soon bye

Transcribed from video

What is Options Vega? The Options Greeks – Options Trading Tutorial By Patrick Boyle