Vegatheoretically projectsImplied Volatility P&L (i.e., Cost or Compensation for Changes in Expected Risk).
Vega is defined as the theoretical dollar amount by which your position will change if implied volatility changes by one percentage point. (Recall from Option Behavior that changes in implied volatility will produce changes in the amount of time value.)
Left Graph. Vega is +5.00, which is the dollar amount by which the option contract will theoretically increase if IV increases by one percentage point. The vega of +5.00 also tells us that we will lose $5.00 from a one percentage point drop in IV.
Right Graph. IV has increased by five percentage points. The graph shows the theoretical increase of $25.00 in the XYZ Jan 35 Call. Had implied volatility dropped by five percentage points, down to 30%, the contract would have theoretically lost $25.00 in value.
Why Vega Is Important Vega gives you an idea of how much you will pay, or be paid, if the market changes its opinion about the upcoming volatility of the stock price. As with all the Greeks, this information is good to know, but it will not tell you what your actual implied volatility profits or losses are.
The Grid to the left conveys that rising implied volatility will generate IV profits, and falling implied volatility will generate IV losses. Of course, depending on the position you have, the reverse could be true.
