Lambda

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.


Filed Under: , ,

comments powered by Disqus
Hot Definitions
  1. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
  2. Gilt-Edged Switching

    The selling and repurchasing of certain high-grade stocks or bonds to capture profits. Gilt-edged switching involves gilt-edged security, which can be high-grade stock or bond issued by a financially stable company such as the Blue Chip companies or by certain governments.
  3. Master Limited Partnership - MLP

    A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture.
  4. Class Action

    An action where an individual represents a group in a court claim. The judgment from the suit is for all the members of the group (class).
  5. Retail Sales

    An aggregated measure of the sales of retail goods over a stated time period, typically based on a data sampling that is extrapolated to model an entire country. In the U.S., the retail sales report is a monthly economic indicator compiled and released by the Census Bureau and the Department of Commerce.
  6. Okun's Law

    The relationship between an economy's unemployment rate and its gross national product (GNP). Twentieth-century economist Arthur Okun developed this idea, which states that when unemployment falls by 1%, GNP rises by 3%. However, the law only holds true for the U.S.
Trading Center