Vega
Principles of Finance glossary · Risk, Return & Portfolio Theory
Definition
The sensitivity of an option's value to volatility.
Vega in plain English
An option is a contract whose value depends partly on how jumpy the underlying stock is expected to be. Vega tells you how much that option's price moves when the expected jumpiness ("volatility") goes up or down. Since an option pays off when prices swing your way, more expected swinging makes the option more valuable, so vega is basically the option's sensitivity to "how wild might things get." If a stock suddenly looks like it's heading into a stormy, unpredictable stretch, high vega means the option's price will climb even if the stock hasn't actually moved yet.
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