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