Effects of IMPLIED VOLATILITY (IV) on Option Greek VEGA – With Past DATA and CHARTS

The following is the behavior of Vega in relation to Implied Volatility (IV) changes:

Vega is higher when volatility increases, particularly for ITM and OTM options.

However, Vega is relatively stable / unchanged for ATM option.

We’ll use the same past actual data as shown in the previous post on the behavior of Delta, namely:

Options Chain for Call options of RIMM as at 3 Sep 2010, when the closing price is $44.78 and Implied Volatility (IV) is 54.05, for expiration month of Sep 2010 (10 days to expiration), October 2010 (38 days to expiration) and Dec 2010 (101 days to expiration).

Here is the summary of Vega values for different IV:

 From the table, we can see that for ITM options (e.g. option’s strike price $35 and $37.5) and OTM options (e.g. option’s strike price $55 and $52.5), Vega increases as IV increases , i.e. as it moves from the left (IV = 25, the lowest IV in this example) to the right (IV = 85, the highest IV in this example).

On the other hand, for near ATM options (i.e. the option’s strike price $45.00, because the stock price is $44.78), Vega is relatively unchanged with the change in IV.

Hence, these observations are in line with the statement above.

Now, let’s study the behavior of Vega of different IV at various strike prices (as shown in the chart below).

As can be seen in the chart:

For all the three options with different IV, Vega always behaves the same way, i.e. Vega of ATM options is always higher, and it gets lower as it moves towards deep ITM and deep OTM options.

However, the decrease in Vega as the option moves from ATM towards deep ITM/OTM will be greater for options with lower IV as compared to options with higher IV.

For deep ITM and deep OTM options, Vega is very small (close to zero) when IV is low. 

To view the list of all the series of articles in this topic, please refer to: 

Behaviour of OPTION GREEKS in relation to TIME REMAINING TO EXPIRATION and IMPLIED VOLATILITY (IV) – With Past DATA and CHARTS

Other Learning Resources:

* FREE Trading Educational Videos with Special Feature

* FREE Trading Educational Videos from Trading Experts

Related Topics:

* Understanding Implied Volatility (IV)

* Understanding Option Greek

* Understanding Option’s Time Value

* Learning Candlestick Charts

* Options Trading Basic – Part 1

* Options Trading Basic – Part 2

Effects of IMPLIED VOLATILITY (IV) on Option Greek THETA – With Past DATA and CHARTS

The following is the behavior of Theta in relation to Implied Volatility (IV) changes:

When Implied Volatility (IV) increases, Theta would be higher.

When IV decreases, Theta will be lower, especially when it is approaching expiration.

We’ll use the same past actual data as shown in the previous post on the behavior of Delta, namely:

Options Chain for Call options of RIMM as at 3 Sep 2010, when the closing price is $44.78 and Implied Volatility (IV) is 54.05, for expiration month of Sep 2010 (10 days to expiration), October 2010 (38 days to expiration) and Dec 2010 (101 days to expiration).

Here is the summary of Theta values for different IV:

From the table, we can observe that:

Regardless of option’s strike prices (ATM/ITM/OTM), Theta always increases as IV increases, i.e. as it moves from the left (IV = 25, the lowest IV in this example) to the right (IV = 85, the highest IV in this example).

Note:

Negative sign (which indicate the losing of time value) is ignored when doing the comparison.

So, these observations verify the statements above.

Now, let’s study the behavior of Theta of different IV at various strike prices (as shown in the chart below).

As can be seen in the chart:

For all the three options with different IV, Theta always behaves the same way, i.e. Theta of ATM options is always higher, and it gets lower as it moves towards deep ITM and deep OTM options.

However, the decrease in Theta as the option moves from ATM towards deep ITM/OTM will be bigger for options with higher IV as compared to options with lower IV.

This is understandable because options with higher IV will contain more time value than options with lower IV (Remember about Options Pricing).

Since Theta is the decrease of time value due to the passage of time, Theta will naturally be higher for options with higher IV as it has more time value to lose, as compared to options with lower IV.

To view the list of all the series on this topic, please refer to:

Behaviour of OPTION GREEKS in relation to TIME REMAINING TO EXPIRATION and IMPLIED VOLATILITY (IV) – With Past DATA and CHARTS.

Other Learning Resources:

* FREE Trading Educational Videos with Special Feature

* FREE Trading Educational Videos from Trading Experts

Related Topics:

* Understanding Implied Volatility (IV)

* Understanding Option Greek

* Understanding Option’s Time Value

* Learning Candlestick Charts

* Options Trading Basic – Part 1

* Options Trading Basic – Part 2

Effects of IMPLIED VOLATILITY (IV) on Option Greek GAMMA – With Past DATA and CHARTS

Impact of Implied Volatility (IV) on Gamma

When the Implied Volatility increases, the Gamma of ATM options decreases, whereas the Gamma for deep ITM or OTM options increases.

When the Implied Volatility is very low, the Gamma of ATM options is relatively high, while the Gamma for deep ITM / OTM options is relatively low (close to 0).

This is because when the volatility is low, the time value portion of an option is low. However, time value of ATM option is still higher relative to ITM & OTM options, hence the Gamma of ATM option is higher as compared to ITM & OTM options.

On the other hand, when IV is high, Gamma tends to be stable for ATM option as well as ITM and OTM options. This is because when volatility is high, the time value of deep ITM / OTM options are already quite substantial. As a result, the increase in the time value of deep ITM / OTM options as they go nearer the money will be less dramatic. Therefore, Gamma tends to be more stable across all strike prices in this case.

We’ll use the same past actual data as shown in the previous post on the behavior of Delta, namely:

Options Chain for Call options of RIMM as at 3 Sep 2010, when the closing price is $44.78 and Implied Volatility (IV) is 54.05, for expiration month of Sep 2010 (10 days to expiration), October 2010 (38 days to expiration) and Dec 2010 (101 days to expiration).

Here is the summary of Gamma values for different IV:

From the table, we can observe that for near ATM options (i.e. the option’s strike price $45.00, because the stock price is $44.78), Gamma decreases as IV increases, i.e. as it moves from the left (IV = 25, the lowest IV in this example) to the right (IV = 85, the highest IV in this example).

Whereas for deep ITM options (e.g. option’s strike price $35 and $37.5) and deep OTM options (e.g. option’s strike price $55 and $52.5), Gamma increase when IV increases.

Hence, these observations show evidence to the first statement above.

Now, let’s observe the behavior of Gamma of different IV at various strike prices (as shown in the chart below) to verify the next statements.

As can be seen in the chart:

For all the three options with different IV, Gamma always behaves the same way, i.e. Gamma of ATM options is always higher, and it gets lower as it moves towards deep ITM and deep OTM options.

That means:

Regardless of IV levels, the delta of ATM option is most sensitive to changes in stock price (i.e. gamma is the highest for ATM option), as compared to ITM and OTM options.

The chart also shows that when the IV is very low (i.e. IV = 25 in this example), the Gamma of ATM options is relatively high, while the Gamma for deep ITM / OTM options is relatively low (close to 0).

When IV is high (i.e. IV = 85 in this example), Gamma values do not change so drastically (i.e. tend to be more stable) as the price moves across different level of option moneyness / strike prices.

Conclusion:

Given the same IV, Gamma of ATM option will always be higher than that of deeper ITM and OTM options.

However, when IV is very low, Gamma of ATM options is relatively high, while the Gamma for deep ITM / OTM options is relatively low (close to 0).

And when IV is very high, Gamma values do not change so drastically (i.e. tend to be more stable) as the price moves from deeper ITM/OTM towards ATM.

Given an ATM option, the option with higher IV will have lower Gamma.

Given a deeper ITM or OTM option, the option with higher IV will have higher Gamma.

To view the list of all the series on this topic, please refer to:
“Behaviour of OPTION GREEKS in relation to TIME REMAINING TO EXPIRATION and IMPLIED VOLATILITY (IV) – With Past DATA and CHARTS.”

Other Learning Resources:

* FREE Trading Educational Videos with Special Feature

* FREE Trading Educational Videos from Trading Experts

Related Topics:

* Understanding Implied Volatility (IV)

* Understanding Option Greek

* Understanding Option’s Time Value

* Learning Candlestick Charts

* Options Trading Basic – Part 1

* Options Trading Basic – Part 2

Behaviour of DELTA in relation to IMPLIED VOLATILITY (IV) – With Past DATA and CHARTS

Previously, we’ve covered about the behavior of Option Greeks in relation to time remaining to expiration.
From this post onwards, we’ll start to move on to discuss the behavior of Option Greeks in relation to Implied Volatility (IV).

The following is the behavior of Delta in relation to Implied Volatility (IV) changes:

When Implied Volatility (IV) increases, Delta of OTM option will increase, whereas the Delta of ITM option will decrease.
However, the Delta of ATM option will always remain at around 0.5.

Now, let’s observe using the past real data.

The following is the Options Chain for Call options of RIMM as at 3 Sep 2010, when the closing price is $44.78, expiration month Sep 2010 (10 days to expiration), and Implied Volatility (IV) is 25, 54.05, and 85, respectively.
(The rows highlighted in yellow are ITM options, while those in white are OTM).

For easier reading and comparison, I summarize the Delta for different IV as follow:

As can be seen from the table, for ITM options (highlighted in yellow), the Delta values decrease when IV increases, i.e. as it moves from the left (IV = 25, the lowest IV in this example) to the right (IV = 85, the highest IV in this example).
In contrast, for OTM options (white rows in the table), the Delta values increase when IV increases.
For near ATM options (i.e. the option’s strike price $45.00, because the stock price is $44.78), the Delta is about the same, i.e. close to 0.5, across all IV levels.

Subsequently, we can look from different point of view, i.e. by comparing Delta at various strike prices at different IV level, as shown in the chart below.

From the chart, we can see that:

The effect of stock price changes on the option price (i.e. Delta) is more “extreme“ for ITM and OTM options with lower IV, as compared to those with higher IV.
Lower IV will push the Deltas of ITM Calls closer to 1 (-1 for Puts) and the OTM option’s Delta closer to 0.

In contrast, for ATM options, the Delta is relatively unaffected to changes in IV level, i.e. all will have Deltas close to 0.5.


To view the list of all the series on the this topic, please refer to:
“Behaviour of OPTION GREEKS in relation to TIME REMAINING TO EXPIRATION and IMPLIED VOLATILITY (IV) – With Past DATA and CHARTS.”

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Behaviour of VEGA in relation to TIME REMAINING TO EXPIRATION – With Past DATA and CHARTS

The following is the behavior of Vega in relation to Time to Expiration:

Assuming all other things unchanged, Vega decreases as the option gets nearer to expiration.

We’ll use the same past actual data as shown in the previous post on the behavior of Delta, namely:
Options Chain for Call options of RIMM as at 3 Sep 2010, when the closing price is $44.78 and Implied Volatility (IV) is 54.05, for expiration month of Sep 2010 (10 days to expiration), October 2010 (38 days to expiration) and Dec 2010 (101 days to expiration).

The summary of Vega values for different Time to Expiration:


As can be seen from the table, for all level of moneyness (ITM, ATM, OTM), Vega values are always lower for the options with expiration month “Sep-10” (nearer to expiration), followed by “Oct-10”, and then “Dec-10” (further to expiration).
This proves the statement above.

Now, let’s move on to compare Vega of different time to expiration at various strike prices.



As can be seen in the chart:

For all the three options with different time to expiration, Vega always behaves the same way, i.e. Vega of ATM options is always higher than deeper ITM and OTM options.

Comparing the Vega values between deeper ITM and OTM options given the same time to expiration, OTM option seem to have higher Vega than ITM option.

This makes sense because ATM options have the highest time value component, and changes in Implied Volatility (IV) would only affect the time value portion of an option’s price.Comparing between ITM & OTM options, volatility changes would have greater effect for OTM options than for ITM options. This because OTM options comprise merely of time value, while ITM options comprise of intrinsic value plus time value. The deeper the ITM options, the smaller the portion of time value the ITM option would have.

To view the list of all the series on the this topic, please refer to:
“Behaviour of OPTION GREEKS in relation to TIME REMAINING TO EXPIRATION and IMPLIED VOLATILITY (IV) – With Past DATA and CHARTS.”

Other Learning Resources:
* FREE Trading Educational Videos with Special Feature
* FREE Trading Educational Videos from Trading Experts

Related Topics:
* Understanding Implied Volatility (IV)
* Understanding Option Greek
* Understanding Option’s Time Value
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2