Skip to content
GetProfitable
Search
Dictionary

Rho

The sensitivity of an option's price to interest rates; small for short-dated contracts and meaningful for LEAPS and deep in-the-money options.

Calls gain value as rates rise and puts lose it, because holding a call rather than the stock frees up cash that can earn interest. For a 30-day option the effect rounds to nothing. For a two-year leaps call it can be worth more than a point of implied-volatility.

Rho also drives one of the few rational reasons to exercise a put early: when interest earned on the strike proceeds exceeds the put's remaining extrinsic-value. In a zero-rate world that never happens; at 5% it happens regularly.

Example: the XYZ two-year $50 call has a rho of 0.62, meaning a one-point rise in rates adds about $62 per contract. The 30-day $50 call has a rho of 0.02, so the same move is worth $2. Same underlying, entirely different exposure.

Related: interest-rate-effect, leaps, early-exercise, option-pricing-inputs

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Payoff of a long call at expiryA flat loss equal to the premium below the strike, turning upward at 45 degrees above it.Profit / loss per share08595115125Strike 105Max loss 3 — the premium paidBreakeven 108Profit keeps growingUnderlying price at expiry
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.

Educational only, not advice. Spotted an error? Post in Site Feedback.