In the wet and wild world of options trading, a vega value tells us how much an option’s price is likely to change based on the volatility of its underlying asset. The higher an option’s vega value is, the more its price is likely to jump or drop with every 1% change in volatility. And that’s really neat and all, but how do we tell how much the vega itself is likely to change? Well, that’s the job of something we call “vomma.” As an asset’s volatility changes, vomma measures the changes to vega.
So...why do we care? Well, let’s say we’ve got a positive vomma going on. If our underlying asset’s volatility increases, then vomma says vega will also increase. If that volatility decreases, then this same positive vomma says that vega will also decrease.
If it sounds a little confusing, think of it this way: a positive vomma just tells us that whatever direction the volatility is going in, the vega will also go. By contrast, a negative vomma tells us that the vega will do the opposite of what the volatility is doing. This can be really handy when we’re trying to choose our spreads, since we might be better able to tell how far in either direction the option’s price is likely to move.
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Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
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