The Vega Riddle
Dear Options addicts, experts, traders and others being interested in option theory,
Last week I was reading a book (about options of course) and a passage on vega struck me. The following text was written:
If a call with a theoretical value of 1.82 has a vega of 0.06 and the Implied Volatility rises one percentage point from, say, 17 percent to 18 percent, the new theoretical value of the call will be 1.88 – it would rise by 0.06, the amount of the vega. If, conversely, the IV declines 1 percentage point, from 17 to 16 percent, the call value will drop to 1.76 – that is, it would decline by the vega.
My question to you is:
When interest would be set at 0% and the text is referring to a non-dividend paying asset, would this call option be:
In the money?
At the money?
Out of the money?
Besides giving the right answer, I would also like to see the right argumentation why the other two answers will not be possible.
I have reserved two free copies of my book, How to Calculate Options Prices and Their Greeks, for the first two persons solving this riddle.