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How to use Vega to hedge option position risks

The risk indicators of options are usually represented by Greek letters, including: delta value, gamma value, theta value, vega value, rho value, etc.

Vega (ν): When measuring the change in the volatility of the underlying asset price, the change in the option price is used to measure the impact of changes in the volatility of the futures price on the option value.

Vega refers to the sensitivity of changes in option premium (P) and changes in underlying exchange rate volatility (Volatility).

The formula is: Vega=change in option price/change in volatility.

If the Vega of an option is 0.15, and if the price volatility increases (decreases) by 1%, the value of the option will increase (decrease) by 0.15. If the futures price volatility is 20%, the theoretical value of the option is 3.25. When the volatility rises to 22%, the theoretical value of the option is

3.55 (3.25+2×0.15); when the volatility is 18% , the theoretical value of the option is 2.95 (3.25-2×0.15). When price volatility increases or decreases, the value of the option will increase or decrease. Therefore, the Vega of both call and put options is positive. The Vega of long option positions are all positive, and the Vega of short options are all negative.

If the Vega value of an investor's position is positive, he or she will profit from the increase in price volatility. On the contrary, he or she hopes that the price volatility will decrease. For Delta-neutral positions, you can not be affected by futures prices and look for profit opportunities from changes in price volatility.

For the buyer of foreign exchange options, the Vega value is always greater than zero, indicating that an increase in the volatility of the underlying exchange rate will increase the value of foreign exchange options; on the contrary, for the seller of foreign exchange options, the Vega value is always burden. Similarly, when a foreign exchange option is at-the-money, the Vega value is the largest; when the option is deeply in-the-money or out-of-the-money, the Vega value is close to zero.