Vega

Vega is the Greek letter used to track the change in an option’s theoretical value, given a 1% change in the volatility for the underlying stock.

Here’s one way that we can actually make use of the information: let’s say there is sudden good news in a stock. When the news hits the wires, the market makers for the stock immediately begin to increase the price of the stock in anticipation of a bullish rally. If investors are willing to overlook the increase in price and purchase the stock regardless of its now overvalued Ask price, the historical volatility for the stock likely increases.

Armed with the current historical volatility figure for the underlying stock, we can calculate the effect of this change to the T-Val of the option. A 1% move in the historical volatility of the underlying stock has a very small effect on the theoretical value of the option, which is why this information is usually monitored only by institutional investors with millions of dollars under management. Individual investors seldom carry enough volume in a given option position to be affected by changes in Vega.