Relish, the Forgotten Condiment...

Fun with Option Greeks....

Just like relish is the forgotten condiment.... Rho is sometimes the forgotten Option Greek. Rho measures how much option pricing changes with a change in interest rates.

While generally considered the LEAST important Greek in the bunch, it has been a factor in recent times. Sharp and consistent changes in interest rates over the past year have most certainly had an effect on option pricing, particularly in LONGER TERM options (LEAPS in particular).

Rho effect is much more pronounced in longer term options than shorter term ones. How have rate changes affected options? Rising rates have served to increase the value of call options that you may have held during this time period (have you noticed?).

A good way to think of what kind of effect Rho has on options is... What would you rather own...stock or calls, when interest rates are rising? Calls, because the cost of carry for stock is higher as rates rise. That puts upward pressure on calls. Likewise, puts tend to drop when rates rise.

Now that rates have had the big move, should we be worried about Rho? Well, that all depends on where you think rates are going in the next year.... ...do they continue up as inflation pressures persist, or will they ultimately plunge as inflation heads back towards the Fed’s target of 2%?

Wish I could tell you the answer, but what I do know is that Rho is back in play... don't forget it when trading and holding longer term options.

PS - give relish another try. It’s lonely…