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. Arbitrage Squeezes Profit From Market Inefficiency

    This influential strategy capitalizes on the relationship between price and liquidity.

  7. Making It Big On Wall Street

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

  8. Quants: The Rocket Scientists Of Wall Street

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

  9. Uncovering Oil And Gas Futures

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

  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. Abatement Cost

    A cost borne by many businesses for the removal and/or reduction of an undesirable item that they have created.

  2. Validation Period

    The amount of time necessary for the premium on an insurance policy to cover the commissions, the cost of investigation, medical exams and other expenses associated with the issuance of the policy.

  3. Winner's Curse

    Because of incomplete information, emotions or any other number of factors regarding the item being auctioned, bidders can have a difficult time determining the item's intrinsic value. As a result, the largest overestimation of an item's value ends up winning the auction.

  4. Glocalization

    A combination of the words "globalization" and "localization" used to describe a product or service that is developed and distributed globally, but is also fashioned to accommodate the user or consumer in a local market.

  5. Disaster Loss

    A special type of tax-deductible loss, similar to a casualty loss, where a loss has been incurred by taxpayers who reside in an area that has been designated as a federal disaster area by the President.

  6. 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.
Trading Center