Put Vega in binary options refers to the rate of change of the price of a put binary option in response to fluctuations in implied volatility. Vega represents the derivative of the fair value of a binary put option with respect to changes in implied volatility.
Put Vega in a nutshell
- Put Vega measures how the price of a put binary option changes with implied volatility.
- Positive Vega for out-of-the-money options, negative for in-the-money options.
- Increased implied volatility boosts the probability of success for out-of-the-money binary put options.
Example: How to calculate Put Vega in Binary Options?
To calculate the Vega for a put binary option, we look at how its price changes when the implied volatility shifts.
For instance, consider a put binary option with a $100 strike price and one month until expiration. If the implied volatility rises from 20% to 25%, causing the option price to increase from $10 to $12, the Vega would be ($12 – $10) / (25% – 20%) = $2 / 5% = $0.40.
This implies that for every 1% rise in implied volatility, the put binary option’s price increases by $0.40. Conversely, a 1% decrease in implied volatility would lead to a $0.40 decrease in the option price.
Which options have positive and which negative values of Put Vega?
The out-of-the-money options have a positive vega, similar to the binary call options. The put binary options’ Vega is negative for in-the-money options. This characteristic results from the increased implied volatility.
How dies increased implied volatility affect Put Vega?
An increase in volatility increases the probability that the price will fall below the strike price and settle as a winner when the binary put option is out-of-the-money. An option out of the money remains a loser even in the alternative scenario where the underlying price has zero volatility and does not move. As a result, the binary put option’s Vega is positive because the fair value of an out-of-the-money binary put option increases in tandem with an increase in implied volatility.
If the underlying asset’s price is fixed and the binary put option is in the money, the option remains a winner. The probability that the underlying price will rise above the strike price and the bet will lose money increases with volatility, which lowers the binary options price. The situation changes when the implied volatility decreases because the price of the underlying asset moves less. This increases the probability that the strategy will be successful and increases the value of the binary put option.
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