In the wet and wild world of options trading, a vega value tells us how much an option’s price is likely to change based on the volatility of its underlying asset. The higher an option’s vega value is, the more its price is likely to jump or drop with every 1% change in volatility. And that’s really neat and all, but how do we tell how much the vega itself is likely to change? Well, that’s the job of something we call “vomma.” As an asset’s volatility changes, vomma measures the changes to vega.
So...why do we care? Well, let’s say we’ve got a positive vomma going on. If our underlying asset’s volatility increases, then vomma says vega will also increase. If that volatility decreases, then this same positive vomma says that vega will also decrease.
If it sounds a little confusing, think of it this way: a positive vomma just tells us that whatever direction the volatility is going in, the vega will also go. By contrast, a negative vomma tells us that the vega will do the opposite of what the volatility is doing. This can be really handy when we’re trying to choose our spreads, since we might be better able to tell how far in either direction the option’s price is likely to move.
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Finance: What is a Derivative?23 Views
finance a la shmoop what is a derivative? well it's derived it's a something taken
from something else like a derivative of hot weather is thirst a derivative of [Girl takes sip of glass of water on a beach]
hunger is well you know crankiness that's diva thing you get there...
derivative of a 1/32 quarterback rating in the NFL is like serious wealth yeah
yeah discount double shmoop yeah look for it be on there with aaron
and a derivative of a stock or bond or other security is a something which
derives its value based on the performance of that underlying security
there are basically two flavors of derivative put options ie the right to [Ice cream flavors appear]
sell a security at a given price over a given time period and a call option, ie
right to buy a security at a given price over a given time period
well the price of that option is derived from the price of the security and a few
other factors like strike prices and duration and all that stuff
colonel electric the downgraded new version of General Electric is trading [Colonel Electric appears in a suit]
for 25 bucks a share a derivative of its share price is sold in the form of a
call option with a $30 strike price expiring about 90 days from now on the
third Friday of the end of that month well investors pay a price albeit
probably a small one for the right to then pay 30 bucks a share for colonel [Call option appears for colonel electric]
electric at any time in the next 90 ish days until that option expires making the bet
that the stock will go well above 30 bucks a share in that time period that
call option is thus a derivative of the colonel electric primary stock price got
it if you really want to get personal well here's the ultimate form of
derivative [Baby laying down]
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