Kappa (Option Pricing) - Explained
What is Kappa?
Written by Jason Gordon
Updated at April 17th, 2022
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
-
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
- Courses
What is Kappa in Option Pricing?
Kappa is a ratio that measures the effect of volatility on the price of an option. It measures how much an options price will change given the level of implied volatility, regardless of whether the underlying stocks price remains the same. Kappa holds that if the underlying investment has a 1% chance, the change in the price of the option will likely occur. Kappa is referred to as Vega in Greek and the letter V symbolizes volatility. Kappa can either be positive pr negative, given the level of change in the price of an option as a result of implied volatility.
Back to:INVESTMENTS & TRADING
How Does Kappa Work?
Kappa is important to investors, it tells them how much impact a change in volatility will affect an options value or price. Kappa also refers to the change in the premium that an investor paid for an option for every 1% change in the implied volatility of the underlying asset. Individual options have a Kappa, while a portfolio comprising of several options or securities has a net kappa (which is realized by summing up the kappas of each position). When a long option has a positive kappa, it means the option increases in value as the implied volatility increases. Negative kappa, on the other hand, is attributed to a short option and means that the option increases in value as the implied volatility reduces.