Color

DEFINITION of 'Color'

The rate at which the gamma of an option or warrant will change over time. More specifically, it is the third order derivative of an options value - once to time and twice to the option's price. Color is part of the group of measures known as the "Greeks" (other measures include delta, gamma and vega) which are used in options pricing models.

BREAKING DOWN 'Color'

Color is used by investors who utilize a gamma-hedging option trading strategy, and provides the investor with information on the gamma of an option per year (the daily figure can be found by dividing the result by the number of days in the year). As the number of days left on the options contract get smaller and smaller, color becomes more volatile and less accurate.


RELATED TERMS
  1. Speed

    The rate at which the gamma of an option or warrant will change ...
  2. Gamma Hedging

    An options hedging strategy designed to reduce or eliminate the ...
  3. Gamma Neutral

    A method of managing risk in options trading by establishing ...
  4. Vega

    The measurement of an option's sensitivity to changes in the ...
  5. DvegaDtime

    The rate at which the vega of an option or warrant will change ...
  6. Vega Neutral

    A method of managing risk in options trading by establishing ...
Related Articles
  1. Trading

    Explaining Gamma

    Gamma is a measurement of how fast the delta of an option’s price changes after a 1-point movement in the underlying security.
  2. Trading

    The Forex Greeks And Strategies

    We look at the different kinds of Greeks and how they can improve your forex trading.
  3. Trading

    An Introduction To Gamma-Delta Neutral Option Spreads

    Find the middle ground between conservative and high-risk option strategies.
  4. Trading

    Using "The Greeks" To Understand Options

    These risk-exposure measurements help traders detect how sensitive a specific trade is to price, volatility and time decay.
  5. Trading

    Getting To Know The "Greeks"

    Understanding price influences on options positions requires learning about delta, theta, vega and gamma.
  6. Trading

    Measuring Options With the Greeks

    Delta, gamma, theta and vega are “the Greeks,” and they provide a way to measure the sensitivity of an option’s price.
  7. Trading

    Using Options Tools To Trade Foreign-Exchange Spot

    Find out how delta, gamma, risk reversals and volatility can all help predict movements in the cash market.
  8. Trading

    The Anatomy of Options

    Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio.
  9. Trading

    Introduction - Day Trading and Options

    Options have not been a tradition part of day-trading strategy, but this is quickly changing.
  10. Trading

    Options Trading Strategies: Understanding Position Delta

    Learn more about the position delta hedge ratio and how it can tell you the number of contracts needed to hedge a position in the underlying asset.
RELATED FAQS
  1. Is there a better metric for hedging options than delta?

    Learn about delta and gamma hedging options, why gamma is a better metric to use to hedge and how gamma can be used with ... Read Answer >>
  2. Do options make more sense during bull or bear markets?

    Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain ... Read Answer >>
  3. How do I measure option liquidity?

    An option is a financial instrument that gives the holder the right to purchase shares in a company at a certain set price ... Read Answer >>
  4. How can derivatives be used to earn income?

    Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>
  5. What's the difference between a regular option and an exotic option?

    Before learning about exotic options, you should have a fairly good understanding of regular options. Both types of options ... Read Answer >>
  6. How does implied volatility impact the pricing of options?

    Learn about two specific volatility types associated with options and how implied volatility can impact the pricing of options. Read Answer >>
Hot Definitions
  1. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  2. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  3. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  4. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  5. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  6. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
Trading Center