Vega
Over the past decade or so, computers have revolutionized option trading.
Options traded through an online broker are filled faster than you can say,
“Oops! I meant to click on puts.” Now trading is facilitated almost entirely
online by professional and retail traders alike. Market and trading
information is disseminated worldwide in subseconds, making markets all
the more efficient. And the tools now available to the common retail trader
are very powerful as well. Many online brokers and other web sites offer
high-powered tools like screeners, which allow traders to sift through
thousands of options to find those that fit certain parameters.
Using a screener to find ATM calls on same-priced stocks—say, stocks
trading at $40 a share—can yield a result worth talking about here. One $40
stock can have a 40-strike call trading at around 0.50, while a different $40
stock can have a 40 call with the same time to expiration trading at more
like 2.00. Why? The model doesn’t know the name of the company, what
industry it’s in, or what its price-to-earnings ratio is. It is a mathematical
equation with six inputs. If five of the inputs—the stock price, strike price,
time to expiration, interest rate, and dividends—are identical for two
different options but they’re trading at different prices, the difference must
be the sixth variable, which is volatility.