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. Delta

    The ratio comparing the change in the price of the underlying ...
  3. Derivative

    A security whose price is dependent upon or derived from one ...
  4. Gamma

    The rate of change for delta with respect to the underlying asset's ...
  5. Implied Volatility - IV

    The estimated volatility of a security's price. In general, implied ...
  6. Greeks

    Dimensions of risk involved in taking a position in an option ...
Related Articles
  1. Implied Volatility: Buy Low And Sell ...
    Options & Futures

    Implied Volatility: Buy Low And Sell ...

  2. Getting To Know The
    Options & Futures

    Getting To Know The "Greeks"

  3. Using
    Options & Futures

    Using "The Greeks" To Understand Options

  4. Understanding Option Pricing
    Options & Futures

    Understanding Option Pricing

Hot Definitions
  1. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  2. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  3. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  4. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  5. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  6. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
Trading Center