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Greek Lessons: Rho Explained
Measuring the Impact of Interest Rate Changes on Option Pricing
An option’s sensitivity to changes in interest rates is known as “rho,” which is one of the Greeks used to determine how an option’s value can change.
One of the more hotly debated topics is exactly when and how much the Federal Reserve will be raising interest rates in the near future. It finally appears a credible plan of systematic interest rate raises is in place.
However, market conditions can still have an impact on whether or not the Federal Reserve adjusts interest rates. After many years of essentially zero rates, it was inevitable that rates should finally move higher.
This is a good opportunity to review how option prices are affected by changes in interest rates (Rho) and what that means.
This post is part of our Greek Lessons blog series explaining the 'Greeks' and options strategies. See more here .
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