Vega: a European option's value against the volatility¶

A European option's vega, its value's change with the volatility, dV/dsigma = S phi(d1) sqrt(T / P); a call's and a put's are one.

sigma is lusine.finance.d1's, the spread over the period P, so vega is per unit of that spread, in the money unit of S (the kernel is generic over it): with P a year it is Hull's S0 sqrt(T) N'(d1), per unit of a volatility a year (a hundredth of it per percentage point). Source: Hull, Options, Futures, and Other Derivatives, 9th ed. (Pearson, 2014), ch. 19. Checked against a reference in numpy, which has its own tests.

Source

Hull, Options, Futures, and Other Derivatives, 9th ed. (2014), ch. 19.

Proof

reference, invariant.

option_vega.trait

namespace lusine.finance;

float<_> option_vega(float<_> spot, float<_> strike, float<year^-1> rate, float volatility, float<year> period,
                     float<year> years)
{
  let a = d1(spot, strike, rate, volatility, period, years);
  return spot * normal_pdf(x = a) * sqrt(years / period);
}

Uses, without proving it here: finance.d1, finance.normal_pdf.

S phi(d1) sqrt(T), a call's and a put's alike, per unit of the volatility over its period.

In [1]:

import os, sys
root = os.getcwd()
while not os.path.isfile(os.path.join(root, 'docsite.json')):
    root = os.path.dirname(root)
sys.path.insert(0, os.path.join(root, 'tools'))
import numpy as np
import matplotlib.pyplot as plt
from scipy.special import ndtr
from scipy.stats import norm
from lusine import trait_run
EPS = float(np.finfo(np.float32).eps)   # Trait's float is binary32
YEAR = 31557600.0                        # lusine's year row, the Julian year in seconds: the host speaks base units

import os, sys root = os.getcwd() while not os.path.isfile(os.path.join(root, 'docsite.json')): root = os.path.dirname(root) sys.path.insert(0, os.path.join(root, 'tools')) import numpy as np import matplotlib.pyplot as plt from scipy.special import ndtr from scipy.stats import norm from lusine import trait_run EPS = float(np.finfo(np.float32).eps) # Trait's float is binary32 YEAR = 31557600.0 # lusine's year row, the Julian year in seconds: the host speaks base units

The kernel¶

The law as the library states it, and as this page runs it.

In [2]:

print(trait_run.source('finance/option_vega.trait'))

print(trait_run.source('finance/option_vega.trait'))

// lusine.finance.option_vega: a European option's vega, its value's change with the volatility, dV/dsigma =
// S phi(d1) sqrt(T / P); a call's and a put's are one. sigma is lusine.finance.d1's, the spread over the period P, so
// vega is per unit of that spread, in the money unit of S (the kernel is generic over it): with P a year it is Hull's
// S0 sqrt(T) N'(d1), per unit of a volatility a year (a hundredth of it per percentage point).
// Source: Hull, Options, Futures, and Other Derivatives, 9th ed. (Pearson, 2014), ch. 19.
// Checked against a reference in numpy, which has its own tests.

namespace lusine.finance;

float<_> option_vega(float<_> spot, float<_> strike, float<year^-1> rate, float volatility, float<year> period,
                     float<year> years)
{
  let a = d1(spot, strike, rate, volatility, period, years);
  return spot * normal_pdf(x = a) * sqrt(years / period);
}

The program¶

A lattice of options, one an item, the kernel bound over them: the prices in euros, the rate a year, the volatility over a period (a year here, Hull's), the life in years. The host speaks the base units, so a time is stored in seconds and a rate per second, and vega is in euros per unit of the volatility. kernel below is that call; closed is the independent account, Black-Scholes in float64 with scipy's exact normal distribution, at the parameters as the device holds them. held rounds them so.

In [3]:

CALL = False
BS = """namespace bs;

lusine.version version = { { number = 1 } };

struct option {
  host float<EUR> spot; host float<EUR> strike; host float<year^-1> rate; host float volatility;
  host float<year> period; host float<year> years;
  float<EUR> option_vega;
};
lattice<option, 1> options(spacing = 1 m, boundary = wall);

void main()
{
  options.option_vega = lusine.finance.option_vega(options.spot, options.strike, options.rate, options.volatility,
                                    options.period, options.years);
}
"""
print(BS)


def held(call, spot, strike, rate, volatility, years, period=1.0):
    """The parameters as the device holds them, in the host's units (euros, a year, years): each rounded to binary32 in
    the base units it is stored in."""
    f = lambda v, scale=1.0: np.float32(np.asarray(v, dtype=float) * scale).astype(float) / scale
    return (np.asarray(call, dtype=bool), f(spot), f(strike), f(rate, 1 / YEAR), f(volatility), f(years, YEAR),
            f(period, YEAR))


def kernel(call, spot, strike, rate, volatility, years, period=1.0):
    """The kernel's option_vega for each option: prices in euros, the rate a year, the volatility over `period` years and the
    life in years, stored in the base units (seconds); the result back in euros per unit of the volatility, one an option (a
    single option's alone)."""
    n = max(np.size(a) for a in (call, spot, strike, rate, volatility, years, period))
    run = trait_run.Program(['finance/option_vega.trait'], BS, {'bs.options': [n]})
    for field, v in (('spot', spot), ('strike', strike), ('rate', np.asarray(rate) / YEAR),
                     ('volatility', volatility), ('period', np.asarray(period) * YEAR),
                     ('years', np.asarray(years) * YEAR)):
        run.store('bs.options', field, np.broadcast_to(np.asarray(v), (n,)))
    out = run.steps('bs.main', 1, [('bs.options', 'option_vega')])[0][0]
    return out if n > 1 else float(out[0])


def closed(call, spot, strike, rate, volatility, years, period=1.0):
    """The independent account: Black-Scholes in float64 with scipy's exact normal distribution, at the parameters
    the device holds."""
    c, S, K, r, v, T, P = held(call, spot, strike, rate, volatility, years, period)
    s = v * np.sqrt(T / P)
    a = (np.log(S / K) + (r + 0.5 * (v * v / P)) * T) / s
    b = a - s
    df = K * np.exp(-r * T)
    return S * norm.pdf(a) * np.sqrt(T / P)


rng = np.random.default_rng(391)
N = 1000
SPOT, STRIKE = rng.uniform(20, 200, N), rng.uniform(20, 200, N)
RATE, VOL, LIFE = rng.uniform(-0.02, 0.15, N), rng.uniform(0.05, 0.9, N), rng.uniform(0.02, 5.0, N)
CALLS = rng.random(N) < 0.5

CALL = False BS = """namespace bs; lusine.version version = { { number = 1 } }; struct option { host float<EUR> spot; host float<EUR> strike; host float<year^-1> rate; host float volatility; host float<year> period; host float<year> years; float<EUR> option_vega; }; lattice<option, 1> options(spacing = 1 m, boundary = wall); void main() { options.option_vega = lusine.finance.option_vega(options.spot, options.strike, options.rate, options.volatility, options.period, options.years); } """ print(BS) def held(call, spot, strike, rate, volatility, years, period=1.0): """The parameters as the device holds them, in the host's units (euros, a year, years): each rounded to binary32 in the base units it is stored in.""" f = lambda v, scale=1.0: np.float32(np.asarray(v, dtype=float) * scale).astype(float) / scale return (np.asarray(call, dtype=bool), f(spot), f(strike), f(rate, 1 / YEAR), f(volatility), f(years, YEAR), f(period, YEAR)) def kernel(call, spot, strike, rate, volatility, years, period=1.0): """The kernel's option_vega for each option: prices in euros, the rate a year, the volatility over `period` years and the life in years, stored in the base units (seconds); the result back in euros per unit of the volatility, one an option (a single option's alone).""" n = max(np.size(a) for a in (call, spot, strike, rate, volatility, years, period)) run = trait_run.Program(['finance/option_vega.trait'], BS, {'bs.options': [n]}) for field, v in (('spot', spot), ('strike', strike), ('rate', np.asarray(rate) / YEAR), ('volatility', volatility), ('period', np.asarray(period) * YEAR), ('years', np.asarray(years) * YEAR)): run.store('bs.options', field, np.broadcast_to(np.asarray(v), (n,))) out = run.steps('bs.main', 1, [('bs.options', 'option_vega')])[0][0] return out if n > 1 else float(out[0]) def closed(call, spot, strike, rate, volatility, years, period=1.0): """The independent account: Black-Scholes in float64 with scipy's exact normal distribution, at the parameters the device holds.""" c, S, K, r, v, T, P = held(call, spot, strike, rate, volatility, years, period) s = v * np.sqrt(T / P) a = (np.log(S / K) + (r + 0.5 * (v * v / P)) * T) / s b = a - s df = K * np.exp(-r * T) return S * norm.pdf(a) * np.sqrt(T / P) rng = np.random.default_rng(391) N = 1000 SPOT, STRIKE = rng.uniform(20, 200, N), rng.uniform(20, 200, N) RATE, VOL, LIFE = rng.uniform(-0.02, 0.15, N), rng.uniform(0.05, 0.9, N), rng.uniform(0.02, 5.0, N) CALLS = rng.random(N) < 0.5

namespace bs;

lusine.version version = { { number = 1 } };

struct option {
  host float<EUR> spot; host float<EUR> strike; host float<year^-1> rate; host float volatility;
  host float<year> period; host float<year> years;
  float<EUR> option_vega;
};
lattice<option, 1> options(spacing = 1 m, boundary = wall);

void main()
{
  options.option_vega = lusine.finance.option_vega(options.spot, options.strike, options.rate, options.volatility,
                                    options.period, options.years);
}

Reference: Hull's example¶

Hull's printed values (Options, Futures, and Other Derivatives, 9th ed., 2014) are quoted from sources that were opened, the book itself not: Example 15.6 (S0 = 42, K = 40, r = 10%, sigma = 20%, six months) as QFRM's BS_Simple documentation cites it, and ch. 19's running example (S0 = 49, K = 50, r = 5%, sigma = 20%, 20 weeks) as the black-scholes-greeks README quotes it. Each is held to half a unit in the last digit printed.

In [4]:

v = kernel(None, 49.0, 50.0, 0.05, 0.20, 20 / 52)
assert abs(v - 12.1) <= 0.05, v
print(f'ch. 19: vega {v:.4f} (12.1), so {v / 100:.4f} a percentage point')

v = kernel(None, 49.0, 50.0, 0.05, 0.20, 20 / 52) assert abs(v - 12.1) <= 0.05, v print(f'ch. 19: vega {v:.4f} (12.1), so {v / 100:.4f} a percentage point')

ch. 19: vega 12.1055 (12.1), so 0.1211 a percentage point

Reference: scipy's Black-Scholes¶

A thousand options: each vega within 1e-6 of its spot from the float64 account.

In [5]:

v = kernel(None, SPOT, STRIKE, RATE, VOL, LIFE)
err = np.abs(v - closed(True, SPOT, STRIKE, RATE, VOL, LIFE)) / SPOT
assert np.max(err) <= 1e-6, np.max(err)
print(f'largest error {np.max(err):.2e} of the spot')

v = kernel(None, SPOT, STRIKE, RATE, VOL, LIFE) err = np.abs(v - closed(True, SPOT, STRIKE, RATE, VOL, LIFE)) / SPOT assert np.max(err) <= 1e-6, np.max(err) print(f'largest error {np.max(err):.2e} of the spot')

largest error 1.97e-07 of the spot

Invariant: per unit of the period's spread¶

Trait spells no unit per root year, so the kernel takes the volatility over a period it is given. The same option with a trading day's volatility, sigma / sqrt(252) over a 252nd of a year, has the same value, and its vega per unit of that smaller spread is sqrt(252) times the year's.

In [6]:

year = kernel(None, SPOT, STRIKE, RATE, VOL, LIFE)
day = kernel(None, SPOT, STRIKE, RATE, VOL / np.sqrt(252.0), LIFE, period=1 / 252)
rel = np.abs(day / (year * np.sqrt(252.0)) - 1)
assert np.max(rel[year > 1e-3 * SPOT]) <= 1e-5, np.max(rel[year > 1e-3 * SPOT])
print(f'a day\'s vega is sqrt(252) times the year\'s, within {np.max(rel[year > 1e-3 * SPOT]):.1e}')

year = kernel(None, SPOT, STRIKE, RATE, VOL, LIFE) day = kernel(None, SPOT, STRIKE, RATE, VOL / np.sqrt(252.0), LIFE, period=1 / 252) rel = np.abs(day / (year * np.sqrt(252.0)) - 1) assert np.max(rel[year > 1e-3 * SPOT]) <= 1e-5, np.max(rel[year > 1e-3 * SPOT]) print(f'a day\'s vega is sqrt(252) times the year\'s, within {np.max(rel[year > 1e-3 * SPOT]):.1e}')

a day's vega is sqrt(252) times the year's, within 2.5e-06

C:\Users\spooo\AppData\Local\Temp\ipykernel\917908667.py:3: RuntimeWarning: invalid value encountered in divide
  rel = np.abs(day / (year * np.sqrt(252.0)) - 1)