Can You Make A Million Dollars Trading Binary Options
Therefore, if volatility declines, prices should be lower. When you own a call or a put (meaning you bought the option) and volatility declines, the price of the option will decline. This is clearly not beneficial and, as seen in Figure 9, results in a loss for long calls and puts. On the other hand, short call and short put traders would experience a gain from the decline in volatility. Volatility will have an immediate impact, and the size of the price decline or gains will depend on the size of Vega. So far we have only spoken of the sign (negative or positive), but the magnitude of Vega will determine the amount of gain and loss. What determines the size of Vega on a short and long call or put?
Vega, just like the other “Greeks” (Delta, Theta, Rho, Gamma) tells us about the risk from the perspective of volatility. Traders refer to options positions as either “long” volatility or “short” volatility (of course it is possible to be “flat” volatility as well). The terms long and short here refer to the same relationship pattern when speaking of being long or short a stock or an option. That is, if volatility rises and you are short volatility, you will experience losses, ceteris paribus, and if volatility falls, you will have immediate unrealized gains. Likewise, if you are long volatility when implied volatility rises, you will experience unrealized gains, while if it falls, losses will be the result (again, ceteris paribus).