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Chapter 37: How Volatility Affects Popular Strategies 751
Stock Price July 50 call July 50 put Implied Volatility Put's Vega
50 7.15 6.54 69% 0.10
7.25 6.64 70% 0.10
7.35 6.74 71% 0.10
Thus, the put's vega is 0.10, too - the same as the call's vega was.
In fact, it can be stated that a call and a put with the same terms have the same
vega. To prove this, one need only refer to the arbitrage equation for a conversion. If
the call increases in price and everything else remains equal - interest rates, stock
price, and striking price - then the put price must increase by the same amount. A
change in implied volatility will cause such a change in the call price, and a similar
change in the put price. Hence, the vega of the put and the call must be the same.
It is also important to know how the vega changes as other factors change, par­
ticularly as the stock price changes, or as time changes. The following examples con­
tain several tables that illustrate the behavior of vega in a typically fluctuating envi­
ronment.
Example: In this case, let the stock price fluctuate while holding interest rate (5% ),
implied volatility (70%), time (3 months), dividends (0), and the strike price (50) con­
stant. See Table 37-1.
In these cases, vega drops when the stock price does, too, but it remains fairly
constant if the stock rises. It is interesting to note, though, that in the real world,
when the underlying drops in price especially if it does so quickly, in a panic mode
- implied volatility can increase dramatically. Such an increase may be of great ben­
efit to a call holder, serving to mitigate his losses, perhaps. This concept will be dis­
cussed further later in this chapter.
TABLE 37-1
Implied Volatility Theoretical
Stock Price July 50 Call Price Coll Price Vega
30 70% 0.47 0.028
40 2.62 0.073
50 7.25 0.098
60 14.07 0.092
70 22.35 0.091