Vega is the change in an option’s theoretical value given a 1% change in the volatility of the underlying. Keep in mind that when a market sells off or in anticipation of a binary event such as earnings, the Volatility increases. So, as the Volatility increases, the premium will also increase even if your underlying stock does not change in price.

A positive Vega can mean either that, when the Implied Volatility goes up, the position generally gains in value, or that when the Implied Volatility goes down, the position generally loses value. On the other hand, a negative Vega can mean either that, when the Implied Volatility goes down, the position generally loses in value, or when the Implied Volatility goes up, the position generally gains value.

An important concept is that the Front Month option prices are effected less by change in underlying Volatility. So, as you approach the Expiration Months for Front Month options, it has less extrinsic value than the Back Month options. Hence they are effected less by the changes in the underlying Volatility.

Let’s go through an example for Vega. Here, let’s assume that the stock price and the days till Expiration stays the same. Assuming the Implied Volatility increases 2 points for the Sept 160 Calls on Dow Jones, the price of the option would increase $1.35. As you can see, when the Volatility is 11.73, the theoretical value is 6.75. If Implied Volatility increases by 2 points to 13.73, the theoretical value will increase to 8.10, which is a change of $1.35. But the most important thing to keep in mind is that, if Implied Volatility increases and you have a positive Vega, then the underlying option will also increase. So, if you are a Long Call or a Long Put and the Volatility increases, then you make more money. And if you are short an option and Volatility increases, you lose money.