Lambda
Candlefocus EditorThe concept of lambda values is considered one of the “minor greeks” of financial literature because it is not as widely referenced as other options measures, such as delta, theta, and vega. Similar to the other greeks, lambda takes into consideration the value of an option in comparison to the changes in the underlying instrument. But in this case, rather than looking at the effects of time, volatility, and strike prices, as the others do, lambda focuses specifically on leverage.
Calculating the lambda value of an option is relatively straightforward but must be done in stages. To calculate the lambda, one must first calculate the delta of the option. This is the rate of the change of the option’s price in response to a one point unit move in the underlying asset’s price. Delta is often a number between 0 and 1, but it can be either a negative or a positive depending on the option’s position. Once the delta has been found, the corresponding lambda is applied.
The lambda value is not calculated the same way as vega or other greeks. It measures the leverage being used, not the rate of change of an option’s price in response to the changes in volatility. Unlike vega, Lambda values are not quoted by financial websites. As a result of this, lambda values must be calculated by traders on their own.
In summary, Lambda values measure the amount of leverage being used when dealing with an option contract. To calculate the lambda, one must first calculate the delta of the option. Lambda values are not quoted directly and must be calculated independently by traders. Lambda values are considered one of the lower tier “minor greeks” of options trading and while they measure the changes in the value of the option, they focus on the effects of leverage, not the effects of time, volatility and strike prices.