Vega
Also called: vega, option vega, vega meaning, volatility sensitivity option, what happens to option price when iv falls.
How it is read
Vega explains the case that confuses most beginners. A call can lose money while the underlying rises. Say implied volatility falls two percentage points on a vega of 5. That is a 10-unit drag on the premium. The drag can exceed the gain delta produced from the move. Vega is largest where uncertainty matters most to the contract's value. It shrinks as expiry approaches. There is less time left for volatility to act on.
What it does not tell you
Vega is a local sensitivity from a pricing model. It is not a forecast. It is not a measured property of the market either. Its units are the single most common error. A fall from 20% to 18% is TWO percentage points. It is also a 10% relative decline. A vega quoted per percentage point uses -2. It never uses -10 and never -0.02. Vega also assumes every other input is unchanged. No real minute of trading obliges that. Vega does not tell you where implied volatility will go. A premium can also move for reasons no Greek in the set accounts for.
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Related concepts
Option Greeks: The Four Sensitivities and the Units They Are Quoted In
The Greeks are four sensitivities of an option's model price. The underlying is the share or index behind the option. Delta is the change in the premium for each ₹1 the underlying moves. Gamma is the change in delta for that same ₹1. Theta is the change for each day, on a stated time convention. Vega is the change per one percentage point of implied volatility. Each is measured where the option is now, and none forecasts anything.
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