Vega
After delta and theta, vega is the next most influential contributor to Kim’s
profit or peril. With Disney at $35.10, the 1.10 premium for the 35-strike
call represents $1 of time value—all of which is vulnerable to changes in
IV. The option’s 1.10 value returns an IV of about 19 percent, given the
following inputs:
Stock: $35.10
Strike: 35
Days to expiration: 44
Interest: 5.25 percent
No dividend paid during this period
Consequently, the vega is 0.048. What does the 0.048 vega tell Kim?
Given the preceding inputs, for each point the IV rises or falls, the option’s
value gains or loses about $0.05.
Some of the inputs, however, will change. Kim anticipates that Disney
will rise in price. She may be right or wrong. Either way, it is unlikely that
the stock will remain exactly at $35.10 to option expiration. The only
certainty is that time will pass.
Both price and time will change Kim’s vega exposure. Exhibit 4.5 shows
the changing vega of the 35 call as time and the underlying price change.
EXHIBIT 4.5 Disney 35 call price–time matrix–vega.