A tool which is used to compare the change in option price to a 1% change in option volatility. Mathematically, lambda is the partial derivative of the option price with respect to the option volatility. For example, if an option’s price has increased 20% in response to a 10% change in volatility, then lambda is 2. The lambda of a portfolio is the rate of change of the value of the overall portfolio with respect to volatility of an underlying asset. If lambda is high, the portfolio’s value is said to be very sensitive to small changes in volatility. If lambda is low, volatility changes would have relatively little impact on the value of the portfolio.
Derivatives
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