Investopedia

Continue to Site »

Lambda

Filed Under » , ,
Dictionary Says

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 Says

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.

Articles Of Interest

  1.

    Implied Volatility: Buy Low And Sell High

    This value is an essential ingredient in the option pricing recipe.

  2. Getting To Know The "Greeks"

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

  3. 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. Understanding Option Pricing

    Take advantage of stock movements by getting to know these derivatives.

  5. The ABCs Of Option Volatility

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

  6. Making It Big On Wall Street

    Read about some of the most glamorous Wall Street jobs and what it takes to land one.

  7. Quants: The Rocket Scientists Of Wall Street

    Blend math, finance and computer skills to command a high - and well deserved - salary.

  8. Uncovering Oil And Gas Futures

    Find out how to stay on top of data reports that could cause volatility in oil and gas markets.

  9. Build A Baby Berkshire

    Get a piece of Warren Buffett's profit by using Form 13F to coattail his picks.

  10. Trading Is Timing

    Learn how to make gains even if you don't get in at the right time.
comments powered by Disqus
Marketplace
Hot Definitions

  1. Fool In The Shower

    The notion that changes or policies designed to alter the course of the economy should be done slowly, rather than all at once.

  2. Pattern Day Trader

    An SEC designation for traders who trade the same security four or more times per day (buys and sells) over a five-day period, and for whom same-day trades make up at least 6% of their activity for that period.

  3. Cost-Push Inflation

    A phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials.

  4. Happiness Economics

    The formal academic study of the relationship between individual satisfaction and economic issues, such as employment and wealth.

  5. Affluenza

    A social condition arising from the desire to be more wealthy, successful or to "keep up with the Joneses." Affluenza is symptomatic of a culture that holds up financial success as one of the highest achievements.

  6. Icarus Factor

    The term Icarus factor describes a situation where managers or executives initiate an overly ambitious project which then fails. Fueled by excitement for the project, the executives are unable to reign in their misguided enthusiasm before it is too late to avoid the failure.
Trading Center