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Rho
The next option-greek that we will study is ‘Rho.’
Rho measures the change in options price with unit change in rate of interest. If rho for put options is -3.8 that signifies that for each unit increase in interest rate, put option price will decrease by 3.8.
- Rho is always positive for the call option and negative for the put option.
- Rho for call and put is different.
- Rho is the highest at ATM and decreases as the spot moves away.
As you might ask, "Why do interest rates impact option prices?"
It has to do with the cost of carrying the position over time. Pricing models take into consideration the cost of capital (or proceeds from short sales) used to offset risk.
The higher the price of the stock and the longer time until expiration generally means a greater sensitivity to changes in interest rates (higher absolute Rho values).
Rho is not of much importance in the Indian market because only short term options are liquid. It is more useful for people who trade in OTC long term contracts.
