Lambda (also called omega) measures the percentage change in an option's value for every 1% change in the stock price.
If a call option has lambda of 5, and the stock rises 1%, the option rises 5%.
This shows the leverage of options. With a small stock move, you get an outsized option move.
Lambda = (Delta × Stock Price) / Option Price
Lambda reveals the leverage in options trading. An option with high lambda will make or lose more money (in percentage terms) than the underlying stock.
This is why options appeal to buyers: they want leverage. But it's also why options are risky: that leverage works both ways.
An at-the-money call might have lambda of 10. An out-of-the-money call might have lambda of 50. The further out-of-the-money, the higher the leverage (and the riskier the bet).
Related: Delta, Leverage, Leverage in Options
