For the lion's (or Godzilla's) share of this definition, it's gonna read like we're describing the plot of a Japanese monster movie. But...stick with us.
Ultima has to do with vomma, which is a derivative of vega (see what we mean?). Let's start with vega. It measures the relationship between the price of an option and the volatility of the underlying asset on which that option is based. So like...you have a call option based on shares of NFLX. Vega measures how the call price changes when implied volatility for NFLX changes.
Vomma is a derivative of vega. It describes the rate at which vega changes. Vega for your NFLX call starts going up; vomma tells you by how much. If it starts going down, vomma will track that as well (it can be positive or negative).
Think of it like the difference between speed and velocity. Speed tells you how fast you're going at a particular moment. Velocity tells you how fast your speed is changing. In this metaphor, vega is speed and vomma is acceleration. Or deceleration. Remember: vomma can be negative or positive, depending on what's happening with vega.
Finally, we get to ultima. It represents a derivative of vomma. So, as vomma is to vega, ultima is to vomma (aaaaand we're back to describing Japanese monster movies). Ultima describes how fast vomma is changing. By the time you get to ultima, you're way into the options weeds. Typically, if you're just using vanilla calls and puts, ultima doesn't come into play. But if you have a strategy involving exotic options, it can be useful in tracking vomma over time. We'll cover mothra some other time.
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Finance: What is a Derivative?23 Views
finance a la shmoop what is a derivative? well it's derived it's a something taken
from something else like a derivative of hot weather is thirst a derivative of [Girl takes sip of glass of water on a beach]
hunger is well you know crankiness that's diva thing you get there...
derivative of a 1/32 quarterback rating in the NFL is like serious wealth yeah
yeah discount double shmoop yeah look for it be on there with aaron
and a derivative of a stock or bond or other security is a something which
derives its value based on the performance of that underlying security
there are basically two flavors of derivative put options ie the right to [Ice cream flavors appear]
sell a security at a given price over a given time period and a call option, ie
right to buy a security at a given price over a given time period
well the price of that option is derived from the price of the security and a few
other factors like strike prices and duration and all that stuff
colonel electric the downgraded new version of General Electric is trading [Colonel Electric appears in a suit]
for 25 bucks a share a derivative of its share price is sold in the form of a
call option with a $30 strike price expiring about 90 days from now on the
third Friday of the end of that month well investors pay a price albeit
probably a small one for the right to then pay 30 bucks a share for colonel [Call option appears for colonel electric]
electric at any time in the next 90 ish days until that option expires making the bet
that the stock will go well above 30 bucks a share in that time period that
call option is thus a derivative of the colonel electric primary stock price got
it if you really want to get personal well here's the ultimate form of
derivative [Baby laying down]
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