Volatility is one of the most importance variables to be able to decide the value of an option. As we have seen there is volatility in the background behind every single Greek discussed. With help from epsilon – often called vega – the large direct impact volatility has on the option’s price can be examined.

Epsilon is the measure that explains how much the option’s price changes if the stocks implied standard deviation – the usual measure of volatility – rise with one percent. If the implied volatility of the stock is 37 percent at the movement and the option’s epsilon is 0.18, the option price will rise 0.18 units if the volatility rise to 38 percent. A high volatility is always positive for the premium (epsilon is always a positive figure), since it drives up the option’s time value. However, epsilon decrease as time passes by. Not surprisingly pari options also have considerably higher epsilon values than plus and minus options, since they can quickly turn to profit or loss from only small movements in the underlying.

When options are traded, it is always necessary to consider the volatility during calculations. For example, consider that you are tempted to buy an option in a stock, three days before the semi annual report will be released. Initially it performs well, but the day following the report the time value invariably decreases. The reason is that the implied volatility in a stock often rises dramatically prior to the day of the report’s publication, just to diminish again when the uncertainty has disappeared, and all the news are presented and priced. The option premium moves in a similar way.