Rho is a measure of the sensitivity of the option price relative to changes in the risk free interest rate. A higher interest rate will be cause the option premium of the option to increase if the rho is positive. If a higher interest rate causes the option premium to decrease, the rho is said to be negative.
The table below illustrates the difference between a call’s rho and a put’s rho.
Type of option | Rho | Interpretation |
Call | Positive | The rho of a call option is always positive. Higher interest rates will increase the call’s value. |
Put | Negative | The rho of a put option is always negative. Higher interest rates will decrease the put’s value. |
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