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Options Trading Terms: V

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VEGA:

An approximation of the change in the price of an option relative to a change in the volatility of the underlying stock when all other factors are held constant. This is typically expressed for a one-percent change in volatility. For example, if a call has a price of $2.00 and a vega of .65, if volatility rises 1%, the call would have a price of $2.65 ($2.00 + (.65 x 1.00)). Generated by a mathematical model, vega depends on the stock price, strike price, volatility, interest rates, dividends, and time to expiration.

VERTICAL:

An option position composed of either all calls or all puts, with long options and short options at two different strikes. The options are all on the same stock and of the same expiration, with the quantity of long options and the quantity of short options netting to zero. A long call vertical (bull spread) is created by buying a call and selling a call with a higher strike price. A short call vertical (bear spread) is created by selling a call and buying a call with a higher strike price. A long put vertical (bear spread) is created by buying a put and selling a put with a lower strike price. A short put vertical (bull spread) is created by selling a put and buying a put with a lower strike price. For example, a short 70/80 put vertical is long 1*70 put and short 1*80 put.

VIX (VOLATILITY INDEX):

Created by the CBOE, the VIX is an index of volatility calculated from the extrinsic value of out of the money SPX index options.

VOLATILITY:

Generically, volatility is the size of the changes in the price of the underlying security. In practice, volatility is presented as either historical or implied.

VOLATILITY SKEW:

Volatility skew, or just "skew", arises when the implied volatilities of options in one month on one stock are not equal across the different strike prices. For example, there is skew in XYZ April options when the 80 strike has an implied volatility of 45%, the 90 strike has an implied volatility of 47%, and the 100 strike has an implied volatility of 50%. If the implied volatilities of options in one month on one stock ARE equal across the different strike prices, the skew is said to be "flat". You should be aware of volatility skew because it can dramatically change the risk of your position when the price of the stock begins to move.

VOLUME:

The total number of shares of stock or option contracts traded on a given day.

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