What is Omega?

Omega is a measure of option pricing, similar to the option Greeks that measures various characteristics of the option itself. Omega measures the percentage change in an option’s value with respect to the percentage change in the underlying price. In this way, it measures the leverage of an options position.

Omega is the third derivative of the option price, and the derivative of gamma. It is also known as elasticity.

How Omega Works

Traders use options for many reasons, but one of the most important is leverage. A small investment in a call option, for example, allows the trader to control a larger dollar value of the underlying security. In other words, a call option trading at $25.00 per contract, or $250, could control 100 shares of a stock trading at $50 per share with a value of $5,000. The holder has the right, but not obligation, to purchase those 100 shares at a specific price (the strike price) by a certain date.

To see leverage in action, assume Ford Motor Co. shares increase 7% in a given period and a Ford call option increases 3% in that same period. The omega of the call option is 3 ÷ 7, or 0.43. This would imply that for every 1% Ford stock moves, the call option will move 0.43%.