The Vega of binary call options measures the price change due to an incremental change in implied volatility. Especially, when trading with binary brokers, Call Vega is often used by people who seek for a reliable binary options trading indicator.
Call Vega in a nutshell
- Call theta measures the price sensitivity of a binary call option to changes in implied volatility.
- Out of the money binary calls have a positive Vega and increase in value as implied volatility rises.
- In-the-money binary call options have a negative Vega; higher implied volatility reduces their value.
How does Vega influence out-of-the-money and in-the-money binary call options?
As with conventional options, a call out of the money has a positive Vega. This is because the option increases in value when implied volatility increases.
Implied volatility often moves in tandem with the underlying volatility. The more volatile the underlying price is, the greater the likelihood that the option that is out of the money will become a profitable option that is in the money. To this end, decreasing implied volatility and reducing time to expiration similarly affect the out-of-the-money binary call option.
Unlike a traditional call option, where an increase in implied volatility increases the option’s value, an in-the-money binary call option has a negative Vega. This means that if the underlying asset is higher than the strike price, an increase in implied volatility will decrease the value of the binary call option.
How does increasing volatility affect the Call Vega?
An increase in volatility increases the probability that the underlying asset’s price will fall below the strike, which will decrease the value of the binary call option. This results in a negative Vega of the binary call option.
