Definition
The term lambda refers to a measure of the percentage change in the premium paid for an option for every percentage change in the price of the underlying asset. Lambda allows the investor to understand the sensitivity of an option's price to a change in the underlying asset's price.
Explanation
Lambda is a measure that allows an investor to understand the anticipated percentage change in the price of an option for every one percent change in the price of the underlying asset. In this manner, lambda is a measure of the implied price volatility of the asset. High lambda values indicate the premium on an option is relatively sensitive to the price volatility of the underlying asset, or security. Low lambda values indicate the premium on an option is relatively insensitive to the price volatility of the underlying asset, or security.
Lambda is one of the "Greek" metrics associated with options; several of the other Greeks include:
Delta: tells the investor the rate of change in the theoretical premium paid or received for an option for one unit change in the price of the underlying asset.
Gamma: tells the investor how fast delta will change if the price of the underlying asset changes by one point.
Kappa or Vega: tells the investor how much the premium on an option will change for every one percentage change in the underlying asset's implied volatility.
Related Terms
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The term margin refers to the minimum level of assets required to support an investment position. When an investor buys securities on margin, they are funding a portion of the purchase price with funds borrowed from a broker.
Moneyzine EditorNovember 6th, 2024
The term maintenance margin refers to the minimum equity portion of the purchase price the investor must maintain when they purchase securities on margin. Maintenance margin thresholds are enforced by brokers and established by the Federal Reserve Board.Moneyzine EditorJanuary 24th, 2024
The term initial margin refers to the portion of the purchase price the investor must pay when buying securities on margin. Initial margin thresholds are enforced by brokers and established by the Federal Reserve Board.Moneyzine EditorNovember 6th, 2024
The term kappa refers to the change in the premium paid for an option for every one percent change in the volatility of the underlying asset. Kappa allows investors to understand the impact a change in volatility will have on an option's value.Moneyzine EditorJanuary 23rd, 2024- The term out-of-the-money refers to an option that has no intrinsic value. The concept of moneyness helps an investor to understand the position of an underlying asset relative to an option's strike price.Moneyzine EditorNovember 6th, 2024
The term deep out-of-the-money refers to an option that has no intrinsic value and the strike price is significantly different than the market price of the asset. The concept of moneyness helps an investor to understand the position of an underlying asset relative to an option's strike price.Moneyzine EditorNovember 6th, 2024- The term near-the-money refers to an option that is close to having intrinsic value based on the strike price of the option relative to the market price of the underlying asset. The concept of moneyness helps an investor to understand the position of an underlying asset relative to an option's strike price.Moneyzine EditorNovember 6th, 2024
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