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+860 Part VI: Measuring and Trading Volatility 
+Example: Again, assume XYZ is at 49, and the January 50 call is selling for 3.50. The 
+vega of the option is 0.25, and the current volatility of XYZ is 30%. 
+If the volatility increases by one percentage point or 1 % to 31 %, then the vega 
+indicates that the option will increase in value by 0.25, to 3. 75. 
+If the volatility had instead decreased by 1 percent to 29%, then the January 50 
+call would have decreased to 3.25 (a loss of 0.25, the amount of the vega). 
+If the implied volatility of an option increases, the option price will increase as 
+well. Consequently, even though XYZ stock may be exhibiting the same historic 
+movement that it always has, and therefore its (historical) volatility would be 
+unchanged, if option buyers appear in sufficient quantity, they may drive the implied 
+volatility of XYZ's options higher. Likewise, an excess of option sellers could drive the 
+implied volatility lower, even though the historical volatility does not change. So, it 
+must be concluded that vega measures how much the option price changes as implied 
+volatility changes. 
+Vega is related to time. Figure 40-6 (see Table 40-6) shows the vegas for options 
+with differing times remaining until expiration. The underlying stock is assumed to 
+be 50 in all cases. Notice that the more time that remains, the higher the vega is. It 
+is interesting to note that, for very long-term options, the vega of the slightly out-of­
+the-money calls (strike = 55) is actually higher than that of the at-the-money. 
+However, this discrepancy disappears as time passes. Not shown, but equally true, is 
+that the vega of a slightly out-of-the-money option on a very volatile stock may be 
+higher than that of the at-the-money. 
+As with the measurements of risk discussed already, vega can refer to the option 
+itself ("option vega") or to the position as a whole ("position vega"). Since vega is 
+expressed as a positive number, if one is long options, then his position vega will be 
+positive. This means he has exposure if volatilities decrease, or can make money if 
+volatilities increase. 
+Example: Again, assume that we have the same backspread position as before, with 
+XYZ at 31.75. 
+Option Position 
+Position Vega Vego 
+Short 4,500 XYZ 0.00 0 
+Short 100 XYZ April 25 calls 0.02 - 200 
+Long 50 XYZ April 30 calls 0.05 + 250 
+Long 139 XYZ July 30 calls 0.07 + 973 
+Total Vega: + 1,023