This is a continuation of series of posts on Option Greeks and Options trading strategies. Beginners may first be interested in reading Call and Put Options examples or Options Premium pricing.
Definition of Rho: Options Greek Rho of an option, is the change in the price of the option for 1% change in risk-free interest rate.
The above logic also makes the following feature of Options Greek Rho clear.
- Options Greek Rho is positive for Call Options.
- Options Greek Rho is negative for Put Options.
- The longer the expiration date of the Option, the higher the value of Rho. Thus Rho is more significant for Option Leaps than for Options with one month expiry.
- Deep Out of the Money Options have lower value of Rho. While At the Money, and In the Money Options have a relatively higher value of Rho.
The most important situation in which Rho matters is when dealing with Options of with expiry dates one or two years away or even more. Such Options with 'far away' expiry dates are sometimes called Options Leaps. While dealing with Options leaps, rho may become significant.
However, in my opinion, for most of the investor's Rho is the least significant among the four Options Greeks.
The formula to Calculate Options Greeks is a bit complicated. However you can download the following Options Greeks Calculator (Excel Spreadsheet Format) which uses Black-Scholes Method and is good for European style Options.
(can be used to calculate Options Greeks Theta, Delta, Vega, Rho and also Options Premium ).
Stock Market Derivatives: Futures, Options
Options Trading Basics
In the Money Stock Options
At the Money Stock Options
Out of the Money Stock Options