The least talked-about Greek is "Vega." But with volatility rampant, Vega holds the key! Simply said, Vega is an estimate of how much the theoretical value of an option changes price when implied volatility changes by +/-1%. Higher implied volatility would mean higher option prices. That is acceptable because with higher volatility comes greater price swings in the stock price. Positive Vega means that the value of an option position increases when implied volatility increases, and decreases when implied volatility decreases. Negative Vega is just the opposite; the value of an option position decreases when implied volatility increases, and increases when implied volatility decreases. That's a mouthful! An easier way to remember it might be to think of it this way: long calls and long puts both always have positive Vega because it measures volatility's impact on those options. Short calls and short puts both always have negative Vega.

For example, the Vega on both the USO MAR 25 call and put is .03, which means that if the implied volatility of the 25 call or put goes up by 1%, the extrinsic value of both the 25 call and put will go up by $0.03. This is because the call and put at the same strike in the same expiration month usually have the same extrinsic value, their Vega will most likely be the same. From thinkorswim's Analyze page (you could also use the Trade page) we have selected "Vega" and "extrinsic" from the information layout to demonstrate.

You can see Vega is highest for ATM options, and is gradually lower as options are ITM and OTM. The Vega of ATM options is higher when either volatility is moved up or there are more days to expiration. With more days to expiration and higher volatility it is implying a greater chance of stock movement. The options' extrinsic value has to rise to take that increased stock range into account. This is why the Vega will be larger for options with more days to expiration.

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