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In options trading, epsilon refers to the elasticity of an option’s value, or how prone to small price changes in the underlying asset a contract is. It is represented by the symbol ε. It is part of a set of mathematical measures that investors use in options trading, alongside delta, gamma, and vega. It can be used to help investors understand how an option’s price will change when there are small movements in financial markets.
The Greeks are mathematical measurements that investors use when trading options. These measurements allow investors to estimate the risk and potential reward of each options contract. Epsilon is a ‘minor Greek’ alongside rho, lambda, and theta. The ‘major Greeks’ in options trading are delta, gamma, and vega.
Epsilon helps options traders assess how sensitive an option contract’s delta, which is how sensitive it is to price volatilities in its underlying asset. It is not a commonly used measure when trading options compared to delta. Nevertheless, it can be useful for investors looking to manage their risk and exposure to changes in price volatility.
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