Why is vega on index so much bigger than vega of a component?

R

rselitetrader

Today is April 5, 2007, 10:54PM PST. I am looking at IBM and SPX April options. I notice that the ATM vega on IBM is 0.0707 and the ATM vega on SPX is 1.0841. This is a huge difference.

Is there any reason vega on index so much bigger than vega on a component? What about other hedge parameters?
 
It has nothing to do with whether it's an index or a component, it's the price of the underlying and the volatility.

SPX calls have a strike of 1445 ATM. IBM calls have a strike of 95 ATM. The strike of SPX is 15 times the strike of IBM.

Take the .0707 vega of IBM, multiply it by 15, and you end up with: 1.0605.

Think of it this way. If both had a 10% annual IV and rallied 10%, IBM would be +9.5, SPX would be +144.5 A 5% IV would have IBM at +4.7, SPX at +72.25.

A 5% volatility change in IBM only represents $4.70, in SPX it's $72.25.
 
Quote from FullyArticulate:

It has nothing to do with whether it's an index or a component, it's the price of the underlying and the volatility.

SPX calls have a strike of 1445 ATM. IBM calls have a strike of 95 ATM. The strike of SPX is 15 times the strike of IBM.

Take the .0707 vega of IBM, multiply it by 15, and you end up with: 1.0605.

Think of it this way. If both had a 10% annual IV and rallied 10%, IBM would be +9.5, SPX would be +144.5 A 5% IV would have IBM at +4.7, SPX at +72.25.

A 5% volatility change in IBM only represents $4.70, in SPX it's $72.25.
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Well, why didn't I think of that! It must be the hangover from my home-brew alcohol.

Thanks!
 
not to mention that the component might have a higher or lower volatility then the overall index.

You could have a stock that even with a market meltdown, would only move a few %, and likewise if the market bubbles.
 
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