Options Indicators
(the Greeks):
Rho
Rho indicates how sensitive an option's fair value is
to small changes in interest rates. It is often expressed as the amount
an option's price would change given a one percentage point move in
interest rates. Basically, it is an estimate of how much the theoretical
value of an option changes when interest rates move 1%. Compared to the
other Greeks, this parameter generally does not have a significant
impact on option prices.
- Long calls
and short puts: Rho is positive for long calls and for short puts;
- Short
calls and long puts: Rho is negative for short calls and for long
puts;
- The value of
puts decreases with an increase in interest rates. Higher interest rates
increase the value of calls;
- The value of
puts is increased, when there is a decrease in interest rates. Lower
interest rates decrease the value of calls.
Rho is one of the least commonly used Greeks. The
probability that the value of an option position will change
dramatically due to a drop or rise in interest rates is fairly low (this
applies only to an economy where interest rates remain relatively
stable).
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