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Vega

Options involve risk and are not suitable for all investors.
Options involve risk and are not suitable for all investors. Certain requirements must be met to trade options. Before engaging in the purchase or sale of options, investors should understand the nature of and extent of their rights and obligations and be aware of the risks involved in investing with options. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options (PDF)" before considering any option transaction. You may also call the Investment Center at 877.653.4732 for a copy. A separate client agreement is needed. Multi-leg option orders are charged one base commission per order, plus a per-contract charge.

What is Vega?

Vega measures the amount of increase or decrease in an option premium based on a 1% change in implied volatility.
Vega is a derivative of implied volatility. Implied volatility is defined as the market's forecast of a likely movement in the underlying security. Implied volatility is used to price option contracts and its value is reflected in the option's premium. Should the market anticipate a greater movement in a security, implied volatility will be higher and the option will be more expensive and vice versa. Vega measures how much the option premium will change if implied volatility were to move by 1%.
Select to close help pop-up An option is at the money if the strike price of the option is equal to the market price of the underlying security.
Select to close help pop-up A call option is out of the money if the strike price is greater than the market price of the underlying security. A put option is out of the money if the strike price is less than the market price of the underlying security.
Select to close help pop-up A call option is in the money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security.
For illustrative purposes only.
Select to close help pop-up The amount by which an option is in-the-money
Select to close help pop-up The amount by which an option total premium exceeds its intrinsic value.
Longer dated options have a higher Vega value. This is a reflection of Vega's sensitivity to time. The more time an option has to be above or below its strike, the more sensitive the option will be to changes in implied volatility. Vega does not affect the intrinsic valueHover to view help pop-upSelect to view help pop-upThe amount by which an option is in-the-money of an option's premium, only the extrinsic valueHover to view help pop-upSelect to view help pop-upThe amount by which an option total premium exceeds its intrinsic value..

How is Vega used?

Long and Short Option's Vega
Long options have a positive Vega and short options have a negative Vega. When buying an option, the purchaser wants the premium to increase and when selling an option, the seller wants the premium to decrease. Should implied volatility increase, there will be an increase in the option's premium. Inversely, if there is a decrease in implied volatility, there will be a decrease in the option's premium. This is why Vega is positive for long (purchased) positions and negative for short (sold) positions.
Vega changes when there are larger price swings (higher implied volatility) which can be equated to higher uncertainty. Lower implied volatility can be connected to lower uncertainty, which equates to less dramatic swings of the underlying security.
A long Vega portfolio means there is positive exposure to increases in implied volatility and a short Vega portfolio is indicative of volatility vulnerability. Remember, high volatility can result in drastic market swings. Volatility typically has a negative correlation to the market – meaning spiked volatility can be reflective of downward market velocity. Managing a portfolio's Vega exposure can help understand volatility risk and the trader's comfort level.
Measuring Volatility
Vega can be used to measure volatility exposure in multi-leg option strategies or an option's portfolio.
For example:
Long 1 XYZ 60 Call with 60 Days to Expiration at +.50 Vega (Long Volatility)
Short 1 XYZ 60 Call with 30 Days to Expiration at -.30 Vega (Short Volatility)
Net Vega: + .20 Vega
This trade is long Vega and has positive volatility exposure.

What are other factors to consider?

Vega and implied volatility can change without any movement in the underlying. Vega should not be confused with volatility. Volatility can be an implied or a historical figure - Vega measures an option position's sensitivity to implied volatility.
Options involve risk and are not suitable for all investors. Certain requirements must be met to trade options. Before engaging in the purchase or sale of options, investors should understand the nature of and extent of their rights and obligations and be aware of the risks involved in investing with options. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options (PDF)" before considering any option transaction. You may also call the Investment Center at 877.653.4732 for a copy. A separate client agreement is needed. Multi-leg option orders are charged one base commission per order, plus a per-contract charge.
View definitions for investment terms in our Glossary.
The material was provided by a third party not affiliated with Merrill or any of its affiliates and is for information and educational purposes only. The opinions and views expressed do not necessarily reflect the opinions and views of Merrill or any of its affiliates. Any assumptions, opinions and estimates are as of the date of this material and are subject to change without notice. Past performance does not guarantee future results. The information contained in this material does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any recommendation in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice.
For purposes of all the computations discussed in this article, commissions, fees and margin interest and taxes, have not been included in the examples. These costs obviously will impact the outcome of any stock or option transaction. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation or solicitation to buy or sell securities. Past performance is not a guarantee of future results.
This material is being provided for informational purposes only. Nothing herein is or should be construed as investment, legal or tax advice, a recommendation of any kind, a solicitation of clients, or an offer to sell or a solicitation of an offer to invest in options. The information herein has been obtained from third-party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed.

Supporting documentation for any claims, comparisons, recommendations, statistics or other technical data will be furnished on request.
Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
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