DEFINITION of 'Kappa'

Kappa tells investors how much an option's price will change for a given change in implied volatility, even if the actual price of the underlying stays the same. One of the options "Greeks," kappa is the ratio of the dollar price change of an option to a 1% change in the expected price volatility (also called implied volatility) of the underlying asset. Kappa is higher the further away an option's expiration date is and falls as the expiration date approaches. This is because the price of an option becomes more sensitive to actual and implied price volatility of the underlying asset as its expiration date gets closer. Just as individual options each have a kappa, an options portfolio has a net kappa that is determined by adding up the kappas of each individual position.

BREAKING DOWN 'Kappa'

A positive kappa is associated with a long option and means that the option becomes more valuable as volatility increases, and a negative kappa is associated with a short option and means the option becomes more valuable as volatility decreases. Kappa, also called Vega, is one of the most important options Greeks. Since Vega is not actually a Greek letter (the "v" in Vega stands for "volatility" just as the "t" in "theta" stands for "time) it is sometimes referred to as kappa. Other important options Greeks include delta, which measures the impact of a change in the underlying asset's price; gamma, which measures the rate of change of delta; and theta, which measures the impact of a change in time remaining to expiration.

RELATED TERMS
  1. Vega

    The measurement of an option's sensitivity to changes in the ...
  2. Option Premium

    1. The income received by an investor who sells or "writes" an ...
  3. Vega Neutral

    Vega neutral is a method of managing risk in options trading ...
  4. Atlantic Spread

    An options trading strategy that involves purchasing both an ...
  5. Volatility Arbitrage

    Volatility arbitrage is a trading strategy that attempts to profit ...
  6. Listed Option

    A listed option is a derivative security traded on a registered ...
Related Articles
  1. Trading

    The Anatomy of Options

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

    Implied Volatility: Buy Low and Sell High

    The success of an options trade can be significantly enhanced by being on the right side of implied volatility changes.
  3. Trading

    Stock Options: What's Price Got To Do With It?

    A thorough understanding of risk is essential in options trading. So is knowing the factors that affect option price.
  4. Trading

    Understanding Option Pricing

    This article will explore what factors you need to consider in the pricing of options when trying to take advantage of a stock price's movement.
RELATED FAQS
  1. What is the relationship between implied volatility and the volatility skew?

    Learn what the relationship is between implied volatility and the volatility skew, and see how implied volatility impacts ... Read Answer >>
  2. Can an option be exercised on the expiration date?

    The use of options has increased dramatically over the years as a way to profit from or hedge against the volatile movements ... Read Answer >>
Hot Definitions
  1. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  2. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  3. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  4. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  5. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
  6. Cash Conversion Cycle - CCC

    Cash conversion cycle (CCC) is a metric that expresses the length of time, in days, that it takes for a company to convert ...
Trading Center