What Option Rho Is
Rho is one of the “option Greeks“. It measures sensitivity of the option’s price to changes in the risk-free interest rate.
Mathematically, rho is the first derivative of option’s price with respect to interest rate.
Option Rho Interpretation
The number you see as rho shows how much the option’s price changes when the risk-free interest rate rises by 1 percentage point per annum.
The units of rho are same as option’s and underlying price – usually dollars per share.
Long calls and short puts have positive rho. Short calls and long puts have negative rho.
Rho is generally greater (in absolute terms – more positive or more negative) for options with longer time to expiration.
The Importance of Rho in Option Trading
In an environment of low and relatively stable interest rates, rho is usually less used and watched than the other Greeks, because the impact of interest rate changes on option prices is much smaller than impact of the other variables (such as volatility or underlying price). However, in times of double digit and volatile interest rates, rho can become very important.