Lambda

AAA

DEFINITION of 'Lambda'

The ratio of the percentage change in an option contract's price to the percentage change in the option's underlying price. Lambda is one of the Greeks – a collection of risk measures or risk sensitivities that are frequently used in options and derivatives analysis. Each Greek measures the sensitivity of a value in relation to a small change in an underlying parameter. Lambda measures the change in option premiums for a percentage point change in its implied volatility. When the lambda value is high, the price of an option will be more sensitive to small changes in volatility. Conversely, when lambda is low, changes in volatility will have less impact on the option's value.

INVESTOPEDIA EXPLAINS 'Lambda'

Lambda is one of many Greeks used in determining and managing risk in options and derivatives trading and investing. The most common Greeks used are: Delta, which measures the rate of change of option value in response to changes in the price of the underlying instrument; Vega, which measures sensitivity to volatility; Theta, which measures the sensitivity of the value against the passage of time; Rho, which measures sensitivity to the interest rate and Gamma, which measures the rate of change in the Delta with respect to changes in the price of the underlying instrument.

RELATED TERMS
  1. Option

    A financial derivative that represents a contract sold by one ...
  2. Implied Volatility - IV

    The estimated volatility of a security's price. In general, implied ...
  3. Volatility

    1. A statistical measure of the dispersion of returns for a given ...
  4. Gamma

    The rate of change for delta with respect to the underlying asset's ...
  5. Vega

    The measurement of an option's sensitivity to changes in the ...
  6. Greeks

    Dimensions of risk involved in taking a position in an option ...
Related Articles
  1. Options & Futures

    Implied Volatility: Buy Low And Sell High

    This value is an essential ingredient in the option pricing recipe.
  2. Options & Futures

    Getting To Know The "Greeks"

    Understanding price influences on options positions requires learning about delta, theta, vega and gamma.
  3. Options & Futures

    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.
  4. Options & Futures

    Understanding Option Pricing

    Take advantage of stock movements by getting to know these derivatives.
  5. Options & Futures

    The ABCs Of Option Volatility

    The mystery of options pricing can often be explained by a look at implied volatility (IV).
  6. Options & Futures

    Examples Of Exchange-Traded Derivatives

    We look at some of the most common exchange-traded derivatives.
  7. Options & Futures

    Advantages Of Trading Futures Over Stocks

    We look at the top eight advantages of trading futures over stocks.
  8. Options & Futures

    Top Brokers Offering Tools For Covered Calls

    Here are the brokers that offer the best tools for investors and traders to write covered calls and covered puts.
  9. Economics

    Effects of OIS Discounting for Derivative Traders

    The use of OIS discounting has important implications for derivative valuations and could positively or negatively impact a trader's profit or loss.
  10. Options & Futures

    Why Trading Coffee Futures Is A Zero Sum Game

    Coffee futures trading is as close to a zero-sum game as you might find in investing. We look at the risks and rewards.

You May Also Like

Hot Definitions
  1. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  2. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  3. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  4. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
  5. Absorption Costing

    A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption ...
  6. Currency Carry Trade

    A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase ...
Trading Center