What leverage is an option actually giving you?
The leverage an option really gives you, which is not its delta.
Interactive: what leverage is an option actually giving you?Medium
Delta says how much the option moves per point of underlying. Elasticity says how much it moves in percentage terms — which is the number that describes the position you are actually holding.
- Option price
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- Delta
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- Elasticity (lambda)
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- Per 1% underlying move
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- Delta exposure
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- Cash outlay at risk
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- Breakeven at expiry
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- Reading
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Move the strike further out of the money and elasticity rises sharply — which is exactly why far out-of-the-money options feel like free lottery tickets and behave like leveraged positions that expire. The delta exposure line is the number to use for position sizing; the outlay line is what you actually lose in the ordinary case.
The idea behind it
This calculator belongs to Equity Derivatives, where the mechanism it computes is explained step by step, with the formula, what each input means and where the simple model stops being right. Everything is computed in your browser; nothing you type is sent anywhere.
Instruments it applies to
- Employee Stock Option — The most widely held equity derivative on earth — granted, not traded, and misunderstood by most of the people paid in it.
- Binary Option — Pays a fixed amount if a condition is met and nothing otherwise. A legitimate institutional building block, and — in its retail form — a product banned across most of the developed world.
- Factor Certificate — Fixed daily leverage, no knock-out — the certificate that can never be stopped out and can still grind itself to dust.
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- Binomial tree — American vs. European — what the right to exercise early is actually worth.