to cont and complete the quiz...
Bullish options positions will yield which result and why ?
Quiz Answer :-
Can be +ve or -ve Vega, depending on Long or Short option positions respectively... (credit to BorderCollie)
Long Option positions = +ve Vega
Short Option positions = -ve Vega
Do not confuse Long and Short to mean Bullish and Bearish...It does not equate
In the Greek language, Vega is not found. Vega is the name of a cosmic star... Nevertheless, Vega influences option values.
Briefly, Vega dictates how much the option value will change for 1% change in Implied Volatility of the underlying. Suppose the Long $45 Call has a Vega of 0.04, then with an increase of 1% of Implied Volatility of the underlying, the value Long $45 Call will increase by 4 cents. Correspondingly, a drop of 1% in IV will cause the value of this Call to decrease by 4 cents as well...
Whether it is Long Call or Long Put, we want price to move in our desired direction. We certainly do NOT want price to stay stagnant. If price gyrates very little; ie. Volatility drops, then the Long Call and Long Put value will diminish over time. To be more specific, here Volatility is referring to Implied Volatility of the underlying.
You will have subtly noticed that there could be a scenario that a Long Call option can increase in value even when price of underlying drops marginally. This happens when IV explodes to the upside, so much that the Vega positively adds to all options value to mitigate the loss of intrinsic value of the options. Many Option Traders prosper and become pauper by Vega !! This is how critical Vega is in the Land of Options....
Thus any Long options positions will have +ve Vega; commonly known as Long Vega positions. Conversely, when I'm Short an option position, I really want price of underlying to go no where, preferably, stay perfectly still. If this happens, over time, I will collect of all the premium from the WRITING that option. Thus, all Short option positions have -ve Vega. Hence, during cocktail parties, when someone says:"I am net short vegas", that means his option portfolio is overall net Short options. He wants market to be tame, not wildly swinging...