Vega (ν) – Measures Volatility Sensitivity

Vega measures how much an option’s price changes with a 1% change in implied volatility (IV). Higher Vega means an option is highly sensitive to changes in volatility, while lower Vega means the option is less affected by volatility swings. Options tend to become expensive when volatility is high and cheap when volatility is low.

Significance:

• Options with high Vega respond more to changes in IV, making them ideal for trading volatility events.
• ATM options have higher Vega than ITM or OTM options.
• Before major events like RBI policy, budget announcements, or elections, IV increases → Option prices rise.
• After the event, IV drops (IV crush) → Option prices fall, even if Nifty/Bank Nifty remains unchanged.
• Useful for volatility-based strategies like straddles and strangles.

Example (Bank Nifty Option before RBI Policy):

• Bank Nifty 47,000 Call has Vega = 10.
• If IV increases from 20% to 21%, the option price increases by ₹10.
• After the policy announcement, IV drops, and the option loses value, even if Bank Nifty remains the same.