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

    Vega is a measurement of an option's sensitivity to changes in ...
  2. Option Premium

    An option premium is the income received by an investor who sells ...
  3. Calendar Spread

    A calendar spread is a low-risk, directionally neutral options ...
  4. Vega Neutral

    Vega neutral is a method of managing risk in options trading ...
  5. Underlying Option Security

    An underlying option security is the financial instrument (stock, ...
  6. Omega

    Omega is an options "Greek" that measures the percentage change ...
Related Articles
  1. Trading

    Options Greeks

    Get to know the essential risk measures and profit/loss guideposts in options strategies.
  2. Trading

    Options: Implied Volatility and Calendar Spread

    Even if risk curves on a calendar spread look enticing, a trader needs to assess implied volatility.
  3. Trading

    An Option Strategy for Trading Market Bottoms

    A reverse calendar spread offers a low-risk trading setup with profit potential in both directions.
  4. Trading

    Getting acquainted with options trading

    Learn about trading stock options, including some basic options trading terminology.
  5. Trading

    Strategies for Trading Volatility With Options (NFLX)

    These five strategies are used by traders to capitalize on stocks or securities that exhibit high volatility.
RELATED FAQS
  1. How does implied volatility impact the pricing of options?

    Learn about two specific volatility types associated with options and how implied volatility can impact the pricing of options. Read Answer >>
  2. Implied Volatility

    Implied volatility is an important concept in option trading. Learn how it is calculated using the Black-Scholes option pricing ... Read Answer >>
  3. 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 >>
  4. When holding an option through expiration date, are you automatically paid any profits, ...

    Holding an option through the expiration date without selling does not automatically guarantee you profits, but it might ... Read Answer >>
  5. Can an option be exercised on the expiration date?

    American options can be exercised up to and including the expiration date but European options can only be exercised on the ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center