Today we will learn the concept of Vega (Volatility) in options trading

Volatility is the probability that a stock swings up and down from its base price. If there are 2 stocks, stockA which swings 5% every day, and then stockB which swings 2% every day — then stockA is more volatile than stockB.

Higher swings mean higher uncertainty and hence the options premium will be higher for stockA vs stockB. In options trading, the volatility is very important. It is measured by calculating the standard deviation. The higher the volatility, the higher the options premium.

So next time you trade options, keep an eye on volatility. If its higher than usual a sensible strategy would be to sell the option and if its lower than usual, buy the option.

On the technical analysis chart, there is an indicator called ATR (Average True Range). It shows the historical daily swing of a stock. If the swing is higher than ATR, the volatility is higher and the options premium will be higher too.

Most often the volatility will revert to mean, so the premiums in options will also fall. That is why I said selling options will give better results during higher volatility.