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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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