A slang term used to describe a situation in which a company's executives accelerate the vesting of their employee stock options. Usually, accelerated vesting is preceded by a period of excessively high employee stock option grants. The result of vest fleecing is that shareholders' ownership is reduced, and option holders are able to turn their options into stock in a shorter time period than if they had not accelerated vesting. A vest fleece results in option holders being given an increased share of ownership in their employers' companies.This term was coined by Jack Ciesielski, founder of The Analyst's Accounting Observer.
An options trading strategy with which a trader makes a simultaneous purchase and sale of two options of the same type that have the same expiration dates but different strike prices. Profits are determined by the widening or narrowing of the difference between the option premiums on the two positions.
The amount that the price of an option changes compared to a 1% change in volatility. Vega changes when there are large price movements in the underlying asset and vega falls as the option gets closer to maturity. Vega can change even if there is no change in the price of the underlying asset, this would happen if there is a change in expected volatility. For example, if the vega of an option is -96.94 and if implied volatility were to rise by 1% then the option value would fall by $96.94.
1. A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.2. A variable in option pricing formulas showing the extent to which the return of the underlying asset will fluctuate between now and the option's expiration. Volatility, as expressed as a percentage coefficient within option-pricing formulas, arises from daily trading activities. How volatility is measured will affect the value of the coefficient used. In other words, volatility refers to the amount of uncertainty or risk about the size of changes in a security's value. A higher volatility means that a security's value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security's value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.One measure of the relative volatility of a particular stock to the market is its beta. A beta approximates the overall volatility of a security's returns against the returns of a relevant benchmark (usually the S&P 500 is used). For example, a stock with a beta value of 1.1 has historically moved 110% for every 100% move in the benchmark, based on price level. Conversely, a stock with a beta of .9 has historically moved 90% for every 100% move in the underlying index.
A derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue as a "sweetener" to entice investors. The main difference between warrants and call options is that warrants are issued and guaranteed by the company, whereas options are exchange instruments and are not issued by the company. Also, the lifetime of a warrant is often measured in years, while the lifetime of a typical option is measured in months.
The difference in implied volatility (IV) between out-of-the-money, at-the-money and in-the-money options. Volatility skew, which is affected by sentiment and the supply/demand relationship, provides information on whether fund managers prefer to write calls or puts.Also known as "vertical skew". A situation where at-the-money options have lower IVs than out-of-the-money options is sometimes referred to as a volatility "smile", due to the shape it creates on a chart (as above). In markets such as the equity markets, a skew occurs because money managers usually prefer to write calls over puts.
A method of quoting option contracts whereby bids and asks are quoted according to their implied volatilities rather than prices. Used mainly by sophisticated investors, volatility quotes benefit those investors who trade upon volatility rather than price. These investors are typically interested in the likelihood of a contract moving up or down in price rather than in its actual cost.
Trading strategies that attempt to exploit differences between the forecasted future volatility of an asset and the implied volatility of options based on that asset. Because options pricing is determined by the volatility of the underlying asset, if the forecasted and implied volatilities differ, there will be a discrepancy between the expected price of the option and its actual market price. A volatility arbitrage strategy is generally implemented through a delta neutral portfolio consisting of an option and its underlying asset. A long position in an option combined with a short position in the underlying asset is equivalent to a long volatility position. This strategy will be profitable if the realized volatility on the underlying asset eventually proves to be higher than the implied volatility on the option when the trade was initiated. Conversely, a short position in an option combined with a long position in the underlying asset is equivalent to a short volatility position, which will be profitable if the realized volatility on the underlying asset is ultimately lower than the option's implied volatility.
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