Rho measures how much an option’s price changes when interest rates rise by 1%. Call options have positive Rho, meaning they increase in value when interest rates rise, while put options have negative Rho, meaning they lose value when interest rates rise. Rho is more relevant for long-term options (LEAPS) and has minimal impact on short-term expiry options.
Significance:
- Rho is important for long-term traders but has minimal impact on weekly or monthly options.
- If interest rates rise, call options become more valuable, while put options lose value.
- If interest rates fall, put options gain slightly in value.
- Rho is crucial when trading options around RBI monetary policy decisions.
Example (Nifty Long-Term Call Option):
- A Nifty 24,000 Call (expiring in 6 months) has Rho = 15.
- If RBI hikes interest rates by 1%, the call option price increases by ₹15.
- Summary of Option Greeks in Nifty & Bank Nifty