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.