Omega
Omega is a measure of options pricing, similar to the option Greeks that measure various characteristics of the option itself. where: V \= Price of the option S \= Underlying price \\begin{aligned} &\\Omega = \\frac{\\text{Percent Change in }V}{\\text{Percent Change in }S}\\\\ &\\textbf{where:}\\\\ &V = \\text{Price of the option}\\\\ &S = \\text{ Underlying price}\\\\ \\end{aligned} Ω\=Percent Change in SPercent Change in Vwhere:V\=Price of the optionS\= Underlying price Omega is calculated based on two of the standard option Greeks, delta and gamma. The equation for omega can also be expressed: Ω \= ∂ V ∂ S × S V \\Omega=\\frac{\\partial V}{\\partial S}\\times\\frac{S}{V} Ω\=∂S∂V×VS Given that the equation for delta is: Δ \= ∂ V ∂ S \\Delta=\\frac{\\partial V}{\\partial S} Δ\=∂S∂V omega can be expressed in terms of delta as: Ω \= Δ × S V \\Omega=\\Delta\\times\\frac{S}{V} Ω\=Δ×VS The most common option Greeks are: Delta (Δ): Change in option value with respect to change in underlying price. Omega measures the percentage change in an option's value with respect to the percentage change in the underlying price.
What Is Omega?
Omega is a measure of options pricing, similar to the option Greeks that measure various characteristics of the option itself. Omega measures the percentage change in an option's value with respect to the percentage change in the underlying price. In this way, it measures the leverage of an options position.
Understanding Omega
Traders use options for many reasons, but one of the most important is leverage. A small investment in a call option, for example, allows the trader to control a larger dollar value of the underlying security. In other words, a call option trading at $25 per contract could control 100 shares of a stock trading at $50 per share with a value of $5,000. The holder has the right, but not the obligation, to purchase those 100 shares at a specific price (the strike price) by a certain date.
Omega is the third derivative of the option price, and the derivative of gamma. It is also known as elasticity.
To see leverage in action, assume 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%.
The formula is as follows:
Ω = Percent Change in V Percent Change in S where: V = Price of the option S = Underlying price \begin{aligned} &\Omega = \frac{\text{Percent Change in }V}{\text{Percent Change in }S}\\ &\textbf{where:}\\ &V = \text{Price of the option}\\ &S = \text{ Underlying price}\\ \end{aligned} Ω=Percent Change in SPercent Change in Vwhere:V=Price of the optionS= Underlying price
Options Greeks
Omega is calculated based on two of the standard option Greeks, delta and gamma. This set of metrics provides a sense of an options contract's risk and reward with respect to different variables. The most common option Greeks are:
Relationship to Delta
An option's gamma is also the rate of change (ROC) in its delta and may be called the delta of the delta.
The equation for omega can also be expressed:
Ω = ∂ V ∂ S × S V \Omega=\frac{\partial V}{\partial S}\times\frac{S}{V} Ω=∂S∂V×VS
Given that the equation for delta is:
Δ = ∂ V ∂ S \Delta=\frac{\partial V}{\partial S} Δ=∂S∂V
omega can be expressed in terms of delta as:
Ω = Δ × S V \Omega=\Delta\times\frac{S}{V} Ω=Δ×VS
Related terms:
Call Option
A call option is a contract that gives the option buyer the right to buy an underlying asset at a specified price within a specific time period. read more
Charm (Delta Decay)
Charm is the rate at which the delta of an option or warrant will change over time. read more
Color
Color is the rate at which the gamma of an option will change over time and is the third-order derivative of an option's value. read more
Delta & Examples
Delta is the ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. read more
Derivative
A derivative is a securitized contract whose value is dependent upon one or more underlying assets. Its price is determined by fluctuations in that asset. read more
Elasticity
Elasticity is a measure of a variable's sensitivity to a change in another variable. read more
Gamma
Gamma is the rate of change of delta with respect to an option's underlying asset price. read more
Greeks
The "Greeks" is a general term used to describe the different variables used for assessing risk in the options market. read more
Lambda
Lambda is the percentage change in an option contract's price to the percentage change in the price of the underlying security. read more
Leverage : What Is Financial Leverage?
Leverage results from using borrowed capital as a source of funding when investing to expand a firm's asset base and generate returns on risk capital. read more