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.
Related or Semi-related Video
Finance: What Is a Put Option?83 Views
finance a la shmoop what is a put option? hot potato hot potato
ow ow! yeah remember that game well nobody wanted the potato, poor thing. the
players wanted to put it in someone else's hands. well put options kind [glue put around a flaming potato]
of work the same way. a put option is the right or option or choice to sell a
stock or a bond at a given price to someone by a certain end date.
all right example time. you bought netflix stock at the IPO a zillion years
ago at $1 a share. that's you know splits adjusted. all right now it's a hundred
bucks a share. if you sell it you pay taxes on a gain of 99 dollars a share. in
California that would be a tax of something like almost 40 bucks. well the
stock was a hundred but you keep only something like 60. feels totally unfair.
right so you really don't want to sell your stock but you're nervous about the [graph shown]
next few months that Netflix will crater for a while and go down ten
maybe twenty dollars. longer term though you think it'll hit 300. so this is the
perfect setup to maybe look at buying some put options on Netflix. if the stock
goes down your put options go up. with Netflix volatile but at a hundred bucks
a share ,you look up the price of an $80 strike price put option expiring in
December, and you know that's mid-september now .for five bucks a share
you can protect your stock for the next few months .think about it like temporary [stocks placed in vault]
term life insurance. you pay the five dollars a share in the stock goes down
to 82 by mid December, worst of all worlds. well not only did you lose the $5
a share but your stock has lost $18 in value. but had Netflix really cratered
and gone to say $60 a share well you would have exercised your put and sold
your shares at 80 bucks. well those put options you paid $5 for
would be been worth 15 bucks a share. in buying that put option you've [equation shown]
guaranteed that your loss will be no more than a $75 value for your Netflix
position at least for that time period and ignoring taxes. well remember that
options expire after December whatever like the third Friday of the month it's
usually when options expire, you then have no protection and your shares float
along naked. naked? really who knew accounting could get so [paper put option goes "skinny dipping".]
raunchy. yeah well that's naked put options.
that's what they really are people.
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A derivative of a security is a "something" which derives its value based on the performance of that security... either a put option or a call option.
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