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This week's question:
DATE: July 18, 2014
Can you explain the concept of Rho, one of the option Greeks, and how an option trader might use it in their trading?
Rho can be defined as the change in an option’s theoretical value due to a change in the interest rate, assuming other factors such as stock price, volatility, and time to expiration remain constant. Rho is one of the option Greeks that estimate how option values change if only one of the inputs changes. Typically, the impact of Rho on an option’s price is generally very small.
As an option trader, you should be more concerned with the change in your option’s price that results from a change in stock price, and not the small change in option price that is specifically related to the interest rate component. To learn more about the concept of the option Greek, Rho, view this segment of “Ask the Institute.”