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Options JiveOption Risks | Volatility (Vega) | Feb 22, 2016
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    Options JiveOption Risks | Volatility (Vega)Feb 22, 2016

    The risk when buying or shorting a stock is in the change of the stock's price. When buying or writing an option the risk is in the change of the option's price. While a stock only has directional risk, an option also has the risk of changing implied volatility (IV).

    Vega is the option Greek that represents the risk of an option position relative to increases or decreases in the prices of those options (IV). On a trading platform, vega is displayed to indicate the risk based on a 1% increase in IV. An example of a short and long option position was displayed. The example included the position risk and vega (negative/positive) on both.

    Vega is theoretical and should be used as a precise measurement of risk. A table calculating a one day increase in the VIX from 12 to 20 using options closest to 30 days to expiration (DTE) demonstrated that it might not be best to load up on short premium trades when IV is low.

    A table of various strangles with options at different delta levels was displayed. The table included the 50 delta, 16 delta and 2.5 delta options. The table showed that options closer to the stock price have the greatest volatility exposure and would have the largest nominal price fluctuations with changes in IV.

    Watch this segment of “Options Jive” with Tom Sosnoff and Tony Battista for the valuable takeaways and a better understanding of option risks and volatility (vega).

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