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. Greeks

    Dimensions of risk involved in taking a position in an option ...
  2. Lambda

    The ratio of the percentage change in an option contract's price ...
  3. Delta

    The ratio comparing the change in the price of the underlying ...
  4. Vega

    The measurement of an option's sensitivity to changes in the ...
  5. Theta

    A measure of the rate of decline in the value of an option due ...
  6. Delta Hedging

    An options strategy that aims to reduce (hedge) the risk associated ...
Related Articles
  1. Investing

    Omega Drops Stake in Apple, Makes Bet on Citigroup (AAPL, GILD)

    Omega sells off shares in Apple, replacing them with an investment in Citigroup, Netflix and more.
  2. Trading

    The Forex Greeks And Strategies

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

    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. Trading

    Getting To Know The "Greeks"

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

    An Undiscovered Growth Stock for Your Portfolio (OFLX)

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

    Options Trading Strategies: Understanding Position Delta

    Learn more about the position delta hedge ratio and how it can tell you the number of contracts needed to hedge a position in the underlying asset.
  7. Trading

    Measuring Options With the Greeks

    Delta, gamma, theta and vega are “the Greeks,” and they provide a way to measure the sensitivity of an option’s price.
  8. Trading

    The Anatomy of Options

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

    How Does Delta Hedging Work?

    Delta hedging is a derivative trading strategy that attempts to reduce -- or eliminate -- the risk caused by price changes in the underlying asset.
  10. Investing

    Explaining Gamma

    Gamma is a measurement of how fast the delta of an option’s price changes after a 1-point movement in the underlying security.
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. What are common delta hedging strategies?

    Learn about common delta hedging strategies, including how to make a position in options delta neutral by offsetting risk ... Read Answer >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. What industries typically use delta hedging techniques?

    Learn what industries use delta hedging techniques for options trading, and understand how delta neutral trading strategies ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center