In options trading, Lambda is the Greek letter assigned to a variable that tells the ratio of how much leverage an option is providing as the price of that option changes. This measure is also referred to as the leverage factor, or in some countries, effective gearing.For example, if the price of Amazon (AMZN) stock rises by $20, a call option purchased with a single strike price of $30 will be more expensive and hence more risky than one purchased at $20. But what happens when Amazon's price falls by $20? The call with strike price $30 will be cheaper and thus riskier than the one with strike price $20.Lambda is the ratio of the change in an option's price with respect to a single variable. In most cases, delta describes the change in option premium as its value changes (such as an "implied" volatility). However, the price of an option can also change depending on more than one variable at a time.For example, an option can trade around its underlying equity's price, which may be affected by another factor as well. In options trading, lambda is used to describe how much should be invested in order to make money if the price of an option itself changes.
