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+Understanding and Managing Leverage    • 169
+Simple Ways of Measuring Option 
+Investment Leverage
+There are several single-point, easily calculable numbers to measure 
+option-based investment leverage. There are uses for these simple measures 
+of leverage, but unfortunately, for reasons I will discuss, the simple num-
+bers are not enough to help an investor intelligently manage a portfolio 
+containing option positions. 
+The two simple measures are lambda and notional exposure. Both are 
+explained in the following sections.
+Lambda
+The standard measure investors use to determine the leverage in an option 
+position is one called lambda . Lambda—sometimes known as percent 
+delta—is a derivative of the delta
+1 factor we discussed in Chapter 7 and is 
+found using the following equation:
+= ×Lambda deltas tock price
+optionprice
+Let’s look at an actual example. The other day, I bought a deep in-
+the-money (ITM) long-tenor call option struck at $20 when the stock 
+was trading at $30.50. The delta of the option at that time was 0.8707, 
+and the price was $11. The leverage in my option position was calculated 
+as follows:
+= × = × =Lambda deltas tock price
+optionprice
+0.87 30.50
+11 2.40
+ 
+What this figure of 2.4 is telling us is that when I bought that option, if the 
+price of the underlying moved by 1 percent, the value of my position would 
+move by about 2.4 percent. This is not a hard and fast number—a change in 
+price of either the stock or the option (as a result of a change in volatility or 
+time value or whatever) will change the delta, and the lambda will change 
+based on those things.