Kappa

According to the Kappa definition, it is regarded as the measure of the price sensitivity of the option contract in response to changes in the Volatility of the given assets. Volatility is known to take into consideration latest changes in the overall price, future price movements, and historical fluctuations in the price. For some trading instrument, like the option, volatility is aimed at capturing the speed and amount at which the price would be moving up & down.

Kappa also goes by the name as Vega. It is one of the primary risk measures in Greece –named so after the Greek letter representing them. The prices for options contracts tend to be impacted by several factors. The options Greeks can be referred to as the ways of measuring factors for influencing the options & its price. Traders are known to make use of the given measurements while analyzing options. The given set of risk measures –including delta, kappa, gamma, and theta, are used for representing how sensitive option can be for fluctuations in Implied volatility, time-value decay, and movements along the price of the Underlying security.

An Insight into Kappa

Kappa is known to measure the overall risk by analyzing the amount that the price changes for the options contract indicate as a response to around one percent change in the implied volatility of the given asset. Kappa tends to be higher when the expiration date of the options tends to be further away. Kappa is known to fall when the expiration date starts approaching. This is because the overall price of the option gets more sensitive to the price fluctuations of the underlying assets with the expiration date getting closer. Options that might expire almost instantly will feature negative kappa. It is due to the fact that options that tend to be expiring in the future will have increased premiums that are assigned to them in comparison to the options that would expire immediately.

When there happens to be significant price fluctuations (indicating volatility) in the Underlying Asset, Kappa would eventually change. Kappa is known to fall as the option will be getting closer to the respective expiration date. Kappa helps in measuring the price fluctuations for each percentage change in the given implied volatility. This form of volatility serves to be a prediction –it might vary from real volatility in the future. Implied volatility can be calculated with the help of a model that helps in determining what the current Market prices are going to be estimating with the respect to the future volatility of the underlying assets.

Kappa is known to be calculated for single options along with the entire set of option Portfolio. When kappa is calculated for the options portfolio, it is denoted as net Kappa.