Omega

DEFINITION of 'Omega'

In finance, omega represents the percentage change in an option's value with respect to the percentage change in the underlying price. Omega (Ω) measures the leverage of an options position.

Ω = percent change in V ÷ percent change in S

where:

V = price of the option

S = underlying price

Omega is also known as "lambda" (λ) and "elasticity."

BREAKING DOWN 'Omega'

For example, if Ford Motor Co (F) shares increase 7% in a given period and a Ford call option increases 3% in that same period, the omega of the call option is 3 ÷ 7, or 0.43. This would imply that for every 1% Ford stock moves, the call option will move 0.43%.

Options Greeks

Omega is one of the Greeks, a set of metrics that give a sense of an options contract's risk and reward with respect to different variables. While there are many Greeks, omega is one of a limited number of first-order Greeks, meaning that it relates directly to the value of an options contract, rather than to another Greek. The most common first-order Greeks are:

Delta (Δ) – change in option value with respect to change in underlying price

Theta (Θ)  – change in option value with respect to change in time to expiration

Rho (ρ) – change in option value with respect to change in risk-free interest rate 

Omega (Ω) or lambda (λ) – percent change in option price with respect to percent change in underlying price

Vega (v) – change in option value with respect to change in underlying volatility (vega is not the name of a Greek letter)

Another common Greek is a second-order variable, gamma (Γ): the derivative of delta, it measures the change in delta with respect to the change in the underlying price. 

Relationship to Delta

The equation for omega can also be expressed:

png.latex?\Omega&space;=&space;\frac{\pa

Given that the equation for delta is:

png.latex?\Delta&space;=\frac{\partial&s

omega can be expressed in terms of delta as:

png.latex?\Omega&space;=&space;\Delta&sp

 

 

 

RELATED TERMS
  1. Delta Neutral

    A portfolio consisting of positions with offsetting positive ...
  2. Atlantic Spread

    An options trading strategy that involves purchasing both an ...
  3. Color

    The rate at which the gamma of an option or warrant will change ...
  4. Delta Spread

    An options trading strategy where the trader initially establishes ...
  5. Delta-Gamma Hedging

    An options hedging strategy that combines a delta hedge and a ...
  6. Rho

    The rate at which the price of a derivative changes relative ...
Related Articles
  1. Trading

    The Forex Greeks And Strategies

    We look at the different kinds of Greeks and how they can improve your forex trading.
  2. Markets

    An Undiscovered Growth Stock for Your Portfolio (OFLX)

    Here's a boring business with the potential to yield big profits for investors.
  3. Trading

    Getting To Know The "Greeks"

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

    Options Basics: How To Read An Options Table

    Sponsor: At last, an easy way to predict stock trends – get your FREE copy of 5 Chart Patterns You Need to Know. By Jay Kaeppel As more and more traders have learned of the multitude of ...
  5. Trading

    The Anatomy of Options

    Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio.
  6. Trading

    Option Spreads: Selling And Buying To Form A Spread

    By John Summa, CTA, PhD, Founder of OptionsNerd.comWhen you buy or sell a call or a put option, you are using only one option strike and, by definition, trading in a single contract month, with ...
  7. Trading

    Options Greeks: Position Greeks

    by John Summa (Contact Author | Biography)Position Greeks can be defined as either the sign or value of any Greek for an outright position, or the net Greeks position when all options legs in ...
  8. Trading

    Options Greeks: Conclusion

    by John Summa (Contact Author | Biography)Greeks play a critical role in strategy behavior, most importantly in determining the prospects for success or failure. The key Greek risk factors - ...
  9. Trading

    Options Greeks: Delta Risk and Reward

    by John Summa (Contact Author | Biography)Perhaps the most familiar Greek is Delta,which measures option sensitivity to a change in the price of the underlying. Delta is most likely the first ...
  10. Investing

    The Basics Of Option Price

    Options can be an excellent addition to a portfolio. Find out how to get started.
RELATED FAQS
  1. Why does delta only range from 1 to -1?

    Learn what the option Greek delta is, what affects the value of delta for an option and why the delta of an option can only ... Read Answer >>
  2. How can you use delta to determine how to hedge options?

    Learn what delta is, how to use delta to hedge options and how to maintain a delta-neutral position by delta-hedging options ... Read Answer >>
  3. What does it mean to say that a straddle is "delta neutral?"

    Learn what the option Greek delta is and what makes a delta-neutral position, and see an example illustrating a delta-neutral ... Read Answer >>
  4. Is there a better metric for hedging options than delta?

    Learn about delta and gamma hedging options, why gamma is a better metric to use to hedge and how gamma can be used with ... Read Answer >>
  5. How can I calculate the delta adjusted notional value?

    Find out how to calculate the delta adjusted notional value of an options contract, and why gross notional value cannot be ... Read Answer >>
  6. Do options make more sense during bull or bear markets?

    Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain ... Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center