Vega as a Crucial Greek

Abstract

Before we can start explaining how the trading activity around plain vanilla options came about [119], we first need to explain the effect of the volatility parameter on the price of an option. Up till now, we have always assumed this parameter to be known, at least up to certain accuracy. We already established at the end of Chapter 4 that this volatility seems to change over time. However, we were talking about the realised volatility. It might be true that there are periods of low and periods of high volatility, but once the option is sold, this will become apparent only through the hedging of the option, namely through the gamma and theta balance, which will be broken.