Omega

What Is Omega?

Omega is a measure of options pricing, like the option Greeks that measure different qualities of the option itself. Omega measures the percentage change in an option's value with respect to the percentage change in the underlying price. Along these lines, it measures the leverage of an options position.

Grasping Omega

Traders use options for some reasons, yet one of the most important is leverage. A small investment in a call option, for instance, permits the trader to control a bigger dollar value of the underlying security. All in all, 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, yet 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 otherwise called elasticity.

To see leverage in real life, expect Ford Motor Co. (F) shares increase 7% in a given period and a Ford call option increases 3% in that equivalent period. The omega of the call option is 3 \u00f7 7, or 0.43. This would suggest that for each 1% Ford stock moves, the call option will move 0.43%.

The formula is as per the following:
$\begin &\Omega = \frac{\textV}{\textS}\ &\textbf\ &V = \text\ &S = \text\ \end$

Options Greeks

Omega is calculated in light of two of the standard option Greeks, delta and gamma. This set of metrics gives a feeling of a options contract risk and reward with respect to various variables. The most common option Greeks are:

• Delta (Δ): Change in option value with respect to change in underlying price.
• Gamma (Γ): The derivative of delta, it measures the change in delta with respect to the change in the underlying price.
• Omega (\u03a9): Percent change in option price with respect to percent change in underlying price.
• Theta (Θ): Change in option value with respect to change so as to expiration.
• Rho (\u03c1): Change in option value with respect to change in risk-free interest rate.
• Vega (v): Change in option value with respect to change in underlying volatility. (Vega isn't the name of a Greek letter.)

Relationship to Delta

An option's gamma is additionally the rate of change (ROC) in its delta and might be called the delta of the delta.

The equation for omega can likewise be communicated:
$\Omega=\frac{\partial V}{\partial S}\times\frac$
Given that the equation for delta is:
$\Delta=\frac{\partial V}{\partial S}$
omega can be communicated in terms of delta as:
$\Omega=\Delta\times\frac$

Features

• The third derivative of the option price, Omega measures the effect of an option's leverage.
• Omega isn't generally referred to among option Greeks.
• This variable is utilized most frequently by option market creators or other sophisticated, high-volume option traders.