The chart below shows the vega values for calls and the
corresponding puts. As you can see, these values match up in
every instance.
Vega can also be used to calculate how much a specific option’s
price will change with a movement in implied volatility. You
simply count how many volatility ticks implied volatility has
moved.
Multiply that number times the vega and either add it (if
volatility increased) to the option’s present value or subtract
it (if volatility decreased) from the option’s present value to
obtain the option’s new value under the new volatility
assumption. The calculation works on individual options and can
be used to calculate the value of the time spread.
Now, let’s apply the concepts of vega to the Time Spread.
When you apply the vega concept to time spreads, you will observe
that as implied volatility increases, so does the value of the time
spread increases. This is because with the out-month option, with the
higher vega it will increase more than the closer month option that has
the lower vega. That will widen or increase the spread.
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