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. Greeks

    The "Greeks" is a general term used to describe the different ...
  2. Option Premium

    An option premium is the income received by an investor who sells ...
  3. Vega Neutral

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

    An underlying option security is the financial instrument (stock, ...
  5. Stock Option

    Stock options give the holder the right to buy or sell shares ...
  6. Listed Option

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

    Using the "Greeks" to Understand Options

    The Greeks provide a way to measure the sensitivity of an option's price to quantifiable factors.
  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

    The Ins and Outs of Selling Options

    Selling options can seem intimidating, but with these tips you can enter the market with confidence.
  4. Trading

    Implied vs. Historical Volatility: The Main Differences

    Discover the differences between historical and implied volatility, and how the two metrics can determine whether options sellers or buyers have the advantage.
RELATED FAQS
  1. Implied Volatility

    Implied volatility is an important concept in option trading. Learn how it is calculated using the Black-Scholes option pricing ... Read Answer >>
  2. 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 >>
  3. How can derivatives be used to earn income?

    Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>
Trading Center