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Investments glossary

Kappa

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— Milton Friedman

Kappa tells investors how much an option’s price will change for a given change in implied volatility, even if the actual price of the underlying stays the same. One of the options Greeks, kappa is the ratio of the dollar price change of an option to a 1% change in the expected price volatility (also called implied volatility) of the underlying asset. Kappa is higher the further away an option’s expiration date is and falls as the expiration date approaches. This is because the price of an option becomes more sensitive to actual and implied price volatility of the underlying asset as its expiration date gets closer. Just as individual options each have a kappa, an options portfolio has a net kappa that is determined by adding up the kappas of each individual position.


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