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Kappa (Vega)

Moneyzine Editor
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Moneyzine Editor
1 mins
January 23rd, 2024
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Kappa (Vega)

Definition

The term kappa refers to the change in the premium paid for an option for every one percent change in the volatility of the underlying asset. Kappa allows investors to understand the impact a change in volatility will have on an option's value.

Explanation

Also known as vega, kappa tells the investor how much the premium on an option will change for every one percentage change in the underlying asset's implied volatility. For example, if an option has a kappa value of 0.50, then the theoretical value of an option will change by 0.5 if the volatility of the option changes by 1%. Two generalizations can be made concerning kappa:

  • Call Options: kappa values will be positive for investors with long positions in an option, such as the holders of a call. As the volatility of the underlying asset, or security, increases the value of the option increases.

  • Put Options: kappa values will be negative for investors with short positions in an option, such as the holders of a put. As the volatility of the underlying asset, or security, decreases the value of the option increases.

Related Terms

  • Margin (Margin Requirement)
    The term margin refers to the minimum level of assets required to support an investment position. When an investor buys securities on margin, they are funding a portion of the purchase price with funds borrowed from a broker.
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  • Maintenance Margin (Maintenance Margin Requirement)
    The term maintenance margin refers to the minimum equity portion of the purchase price the investor must maintain when they purchase securities on margin. Maintenance margin thresholds are enforced by brokers and established by the Federal Reserve Board.
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  • Initial Margin (Initial Margin Requirement)
    The term initial margin refers to the portion of the purchase price the investor must pay when buying securities on margin. Initial margin thresholds are enforced by brokers and established by the Federal Reserve Board.
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  • Lambda (Options)
    The term lambda refers to a measure of the percentage change in the premium paid for an option for every percentage change in the price of the underlying asset. Lambda allows the investor to understand the sensitivity of an option's price to a change in the underlying asset's price.
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  • The term out-of-the-money refers to an option that has no intrinsic value. The concept of moneyness helps an investor to understand the position of an underlying asset relative to an option's strike price.
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  • Deep Out-of-the-Money (Options)
    The term deep out-of-the-money refers to an option that has no intrinsic value and the strike price is significantly different than the market price of the asset. The concept of moneyness helps an investor to understand the position of an underlying asset relative to an option's strike price.
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  • The term near-the-money refers to an option that is close to having intrinsic value based on the strike price of the option relative to the market price of the underlying asset. The concept of moneyness helps an investor to understand the position of an underlying asset relative to an option's strike price.
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