The absolute change in option price in response to a percentage point change in volatility. Tau is used by traders to capture the sensitivity of option value to a change in implied volatility. For example, a tau of 0.85 indicates an absolute increase in the option’s theoretical value by 0.85 if volatility edges up by a percentage of 1.0. Likewise, it indicates an absolute decrease in the option’s theoretical value by 0.85 if volatility falls by a percentage of 1.0.
Vega, Kappa, and Zeta are also interchangeably used to signify the same meaning of Tau.
