What measures the risk from changes in implied volatility for option pricing?

The measure of risk from changes in implied volatility for option pricing is known as Vega. Vega quantifies how much the price of an option is expected to change with a 1% change in implied volatility. As implied volatility increases, the extrinsic value of options typically rises, which can lead to increased option prices. Conversely, if implied volatility decreases, the prices of options may decline. Understanding Vega is crucial for traders and analysts as it helps them assess the potential impact of volatility shifts on option pricing and make informed decisions related to option trading strategies.

Delta, on the other hand, measures the sensitivity of the option's price to changes in the price of the underlying asset. Gamma relates to the rate of change of Delta with respect to changes in the underlying asset's price, providing insight into the stability of Delta. Rho measures the sensitivity of an option's price to changes in interest rates. While all of these Greeks are important for understanding option pricing and risk, only Vega specifically addresses the impact of changes in implied volatility.