What is the Binary Options Tunnel Vega? | Definition & Formula


Tunnel Vega measures how a change in implied volatility affects the fair value of a binary option. It is also mathematically expressed as the first derivative of the fair value of a binary options tunnel.

Binary Options Tunnel Vega in a nutshell

  • Tunnel Vega measures the impact of implied volatility changes on binary option values.
  • Mathematical formula relates Vega to the sensitivity of option prices to volatility shifts.
  • Vega’s behavior indicates shifting probabilities between strikes on different time profiles.

What does Binary Options Tunnel Vega describe mathematically?

Mathematically, the binary options tunnel vega describes the sensitivity of the option price to changes in implied volatility. This relationship is expressed by the following expression:

where:

  • V: The Vega of the binary option tunnel contract,
  • P: The price of the binary option tunnel contract, and
  • σ is the implied volatility.

What are the features of the Tunnel Vega metric?

The soybean chart on TradingView
The soybean chart on TradingView

The features of the Tunnel Vega metric include its sensitivity to changes in implied volatility, which affects the pricing of options within a tunnel strategy. Suppose we select the 1-day vega profile from the soybean chart. In that case, we see that the Vega is slightly different from zero halfway between strikes. This indicates that the probability of the price going down has increased due to the longer time to expiration.

On a 10-day profile, this pattern continues. But we also notice that the absolute value of the Binary Options Tunnel Vegas decreases again. This is because the probability of the price being between strikes is becoming less dependent on the current strike price.

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Besides, it is noticeable that from an implied volatility of 20% and above, there is not much difference between Vega and other indicators. This can be a possible indication of an even price rise. Keep that in mind for your next binary options trade.

Is Tunnel Vega a helpful metric in Binary Options Trading?

Yes, Tunnel Vega can be a helpful metric that you can use in binary options trading. However, I always recommend having a closer look not only at the Vega, but also at the Tunnel-Theta, Tunnel-Gamma, and Tunnel-Delta. If you have determined all four values, your chances of making better predictions about market movements increase.

See other articles about Binary Tunnels:

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About the author

Marc Van Sittert
Marc Van Sittert is an experienced Binary Options Trader and coach who is originally from South Africa. He started his career in 2014 by trading old-school Binary Options online. His main focus is on short-term contracts with 60-second trades.

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