18 lines
1.2 KiB
Plaintext
18 lines
1.2 KiB
Plaintext
The Effect of Moneyness on Vega
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Like the other greeks, vega is a snapshot that is a function of multiple facets
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of determinants influencing option value. The stock price’s relationship to
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the strike price is a major determining factor of an option’s vega. IV affects
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only the time value portion of an option. Because ATM options have the
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greatest amount of time value, they will naturally have higher vegas. ITM
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and OTM options have lower vega values than those of the ATM options.
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Exhibit 2.13 shows an example of 186-day options on AT&T Inc. (T),
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their time value, and the corresponding vegas.
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EXHIBIT 2.13 AT&T theos and vegas (T at $30, 186 days to Expry, 20%
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IV).
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Note that the 30-strike calls and puts have the highest time values. This
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strike boasts the highest vega value, at 0.085. The lower the time premium,
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the lower the vega—therefore, the less incremental IV changes affect the
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option. Since higher-priced stocks have higher time premium (in absolute
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terms, not necessarily in percentage terms) they will have higher vega.
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Incidentally, if this were a $300 stock instead of a $30 stock, the 186-day
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ATMs would have a 0.850 vega, if all other model inputs remain the same. |