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Welcome to your source for answers to questions about option concepts, strategies, and terminology. A new question and answer is published each week. To view the Ask the Institute archives, click the "Ask the Institute Archive" link below.

Please note, questions WILL NOT be personally answered and may not be chosen for publication on the web site.

View the archive of all "Ask the Institute" questions.

 

This week's question:

DATE: July 18, 2014

QUESTION:

Can you explain the concept of Rho, one of the option Greeks, and how an option trader might use it in their trading?

ANSWER:
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.”

CBOE Volatility Index (VIX)