Dan Passarelli, CEO - Market Taker Mentoring

I tend to talk about the Greeks a lot because I, well, wrote the book on the Greeks, as they say. I talk about Delta, I talk about Theta, I talk about Vega. And guess what? Now it's time for me to talk about Rho.

And it's time for you to start paying attention to Rho. So what Rho is: it's the option Greek that measures in option prices sensitivity to interest. The easiest way to understand this is: if I were to buy 100 shares of Apple and hold it for a year, it would cost me, well, let's see, it's $129 a share around it, right? So times 100, that would be $12,900, right? Or I could buy a call option instead and hold that for a year, like these 365 day options right here.

But I could buy those for $19.85. That's $1,985, like two grand. So I would be putting up significantly less money and I would have a position that profits either way. Now, don't get me wrong, there's a lot of caveats and a lot of nuances there to talk about like Delta and Theta and all that, but I would own the rights to buy 100 shares.

But here's the thing. If I buy the call, I'm paying so much less money that I could take the money that I would have spent on the stock and I could put it in the bank and earn interest on it. In many years before now, interest didn't really matter because interest rates were close to zero. But as interest rates rise, it kind of becomes a big deal and it affects longer term options more because interest takes more of a toll or gives you more of an advantage the more time the asset is held. So the Rho on this 365 day at the money option is 52 cents because calls have an advantage when it comes to interest. Because again, I can put the money I didn't spend on the stock in the bank and make interest.

When interest rates go up, the value of calls go up. If the interest rates went up one full point, the theoretical value of the call option would go up by $0.52. That means we'd see the bid go up by fifty two cents and the offer goes up by fifty two cents. Now that of course is if interest rates rose a whole point. If they only rose half a point, they go up by twenty five cents and so on and so on.

As interest rates continue to rise, this will have an effect on your call positions and your put positions. Those are just the opposite. As interest rates rise, that hurts put positions for just a different reason. But I want you to start paying attention to that. I want you to get good with it. Especially when you're trading long term options. I hope that helps. 

(Dan's book: Trading Option Greeks is listed as one of the Best Options Trading Books by New Trader U. It is available on Amazon - here.)