The Effects of Volatility on the Time Spread When Trading Options (3)

As we continue to discuss vega, keep these facts in mind


1. Vega measures how much an option price will change as volatility changes.


2. Vega increases as you look at future months and decreases as you approach expiration.


3. Vega is highest in the at the money options.


4. Vega is a strike-based number - it applies whether the strike is a call or a put.


5. Vega increases as volatility increases and decreases as volatility decreases.



It is important to note that an option's volatility sensitivity increases with more time to expiration.


That is, further out-month options have higher vegas than the vegas of the near term options.


The further out you go over time, the higher the vegas become.