DEFINITION of 'Omega'
Ω = percent change in V ÷ percent change in S
V = price of the option
S = underlying price
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%.
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:
Given that the equation for delta is:
omega can be expressed in terms of delta as: