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The 6-Week Options Trading Kickstarter: Meet the Greeks!

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Steve Smith breaks down delta, theta, vega, gamma, and rho.

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Vega

Vega is the expected change in an option's value for a one-unit move in implied volatility. Again, the strict formula is defined as a 1% move, but for practical purposes it will typically be expressed in dollars per one-point move.

Let's see if we can put these three Greeks together.

Last Thursday, Google (NASDAQ:GOOG) closed at $593 prior to its earnings release. The August $600 call had a value of $16.80 per contract. Its delta was 0.46 and its theta was 0.35.

The implied volatility was 29.5% and the vega was 0.66.

On Friday, following the earnings report, shares rose $17 to trade at $610. Based on the delta and theta, we'd expect the $600 calls to gain around $7.80 and be trading around $24.60 per contract. But at midday, those calls were trading around $20 per contract. The $4.60 discrepancy can be attributed the fact that implied volatility dropped eight points to 21.5%. So with a vega of 0.66, that would translate to $5.28 in lost value (8 x 0.66 = $5.28). The increase in delta from 0.46 to 0.64 helped to offset some of the decline in implied volatility.

Again, using the options calculator is a great way to play out various scenarios.

We'll end with a quick dismissal of the last two Greeks.
No positions in stocks mentioned.

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