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