Rho
Measures sensitivity to changes in interest rates.
What is Rho?
In the world of options trading, Rho is one of the primary "Greeks" used to measure risk sensitivity. While option prices may seem random to outsiders, they are driven by mathematical variables. Rho isolates one of these specific drivers.
The Sensitivity
- Measures: How much the option's value changes in response to changes in a specific market variable (e.g., price, time, volatility).
- Unit: Expressed as a value per unit change in the underlying factor.
How to Interpret It
| Sign | Implications |
|---|---|
| Positive (+) | The position gains value as the underlying factor increases. |
| Negative (-) | The position loses value as the underlying factor increases. |
For example, if you are "Long Rho," you generally want exposure to that specific risk factor. If you are "Short Rho," you are hurt by it.
Practical Application
Professional traders don't just "buy calls"; they manage a portfolio of Greeks. Managing Rho allows you to:
- Hedge Risk: Neutralize unwanted exposure (e.g., "Delta Neutral").
- Target Alpha: Bet purely on this specific variable (e.g., "Gamma Scalping").
Tip: Rho is not static. It changes as the stock price moves and time passes. This "second-order" change is also measured by other Greeks (like Gamma or Vomma).
This entry is part of the VolParadox Options Glossary, a living database of trading terminology.