# Definition of Omega

By Mark Holland / 5 days ago

## What is Omega?

Omega is a measure of the price of options, similar to the Greek option that measures various characteristics of the option itself. Omega measures the percentage change in the value of an option relative to the percentage change in the underlying price. In this way, it measures the leverage of an options position.

### Key takeaways

• The third derivative of the option price, Omega measures the effect of an option’s leverage.
• Omega is not always referred to among option Greeks.
• This variable is most often used by option market makers or other sophisticated, high-volume option traders.

## Understanding Omega

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 higher dollar value of the underlying security. In other words, a call option trading at $25 per contract could control 100 shares of a stock trading at$ 50 per share with a value of \$ 5,000. The holder has the right, but not the obligation, to buy those 100 shares at a specified price (the strike price) before a specified date.

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

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

The formula is as follows: