I am looking for some more information about Options Lambda or leverage. It would be interesting to see how leverage changes in options as they move further away from the strike as well as its relationship to the other greeks. Does anyone have any detailed resources? Books showing models? etc... Not really a lot of info out there as It is considered a minor greek...I found this PDF article which isn't bad (although he misspelled Nick Leeson's name lol).
You can do the analysis yourself in excel, but I have never looked at this metric nor has anyone else I have ever traded alongside with. delta provides a more relevant understanding of sensitivity to underlying.
1. An option is a basket of risks. The premium of an option isn’t really relevant. Here the percent return isn’t relevant. 2. the option as an asset itself. Maybe percent return is useful but it will lead to weird conclusions: for example if you buy a call and simultaneously sell a put, you have created the payoff of a synthetic stock. The stock return is clear. What’s the lambda of the short put and of the long call. How do you compare them as a portfolio and how do you compare them to the long stock they synthetically created.
I am thinking more in terms of one way directional bets (where you are expecting a major move) looking to compare leverage to premium...I understand that the further OTM the higher the leverage but at some point is there a diminishing rate of return? Taking Delta into consideration, what is the lowest you would be willing to go on this type of play? And I appreciate you replying to me please forgive my ignorance and lack of experience on many things.
If you are looking to place bets then maybe try something else. Options are managed risk or ...risk management. Never used Lamda -still trading options after 20 years of being a moron
there is no clear answer. It depends on your view and the price of option. You obviously want to maximize your profit / investment while taking into account the risk of the investment. Percent return unfortunately isn’t enough - it’s going tobe driven by the underlying Greeks (delta, gamma, Vega) anyway so you will have to determine the pnl as per #1 in my post above.
I looked into this a few months ago. I had the idea that I could replicate UPRO, or TQQQ trading it myself, rather than paying the fees. Both of those symbols attempts to have exactly 3x leverage, so the "lambda" as you call it would be 3. The idea here is to make delta as close to constant as possible, and gamma as close to 0 as possible. The idea was to add options to my portfolio (calls or puts) which moved the leverage ratio towards 3, but moved gamma closer to 0. Unlike those ETFs, I planned on rebalancing biweekly, rather than daily, to minimize volatility drag.
If you want to add options to your portfolio (QQQ), why do you want to limit gamma to 0 when going long (TQQQ)? I want gamma to be my best weapon instead of neutralizing it?