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Trading Options Greeks: How Time, Volatility, and Other Pricing Factors Drive Profits, 2nd Edition by Dan Passarelli

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CHAPTER 7

Rho

Interest is one of the six inputs of an option-pricing model for American options. Although interest rates can remain constant for long periods, when interest rates do change, call and put values can be positively or negatively affected. Some options are more sensitive to changes in the interest rate than others. To the unaware trader, interest-rate changes can lead to unexpected profits or losses. But interest rates don’t have to be a wild-card risk. They’re one that experienced traders watch closely to avoid unnecessary risk and increase profitability. To monitor the effect of changes in the interest rate, it is important to understand the quiet greek—rho.

Rho and Interest Rates

Rho is a measurement of the sensitivity of an option’s ...

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