subject: Rho Option Greeks [print this page] Option Greeks are the quantities representing the price sensitivities of an options based on it's underlying. It is called Greeks because these sensitivities are often denoted by Greek letters. The Greeks are vital tools for risk management. With Greek, we can re-balance our portfolio to achieve a desired exposure.
There are five option Greeks which we will use to manage option risk.
The first four below are the first order derivatives, and the last is the second-order derivative of value function.
Delta -> measures change in option price due to a change in stock price
Theta -> measures change in option price due to time passing
Vega -> measures change in option price due to volatility changing
Rho -> measures change in option price due to a change in interest rates
Gamma -> measures change in delta due to a change in stock price
Rho is a change in option value due to movements in interest rates. The value represents change in option price for one percentage point movement in the underlying interest rate. If an option price is $1.5 and has a Rho value of .25, then if interest rates increase from 2% to 3%, then the price of the option theoretically will increase from $1.50 to $1.75. Rho is one of the least used greeks, because interest rates is normally stable.
Long calls and short puts have positive rho while short calls and long puts have negative rho. Positive rho means option price will increase if interest rate increases and decrease when interest rate decreases. Negative rho means option price will increase if interest rate decreases and increase when interest rate decreases.
The longer the time to expiration, the rho will be higher. Deep Out of The Money tend to have low Rho, while Deep In The Money has higher Rho.
