What is 'Rho'
Rho is the rate at which the price of a derivative changes relative to a change in the riskfree rate of interest. Rho measures the sensitivity of an option or options portfolio to a change in interest rate.
For example, if an option or options portfolio has a rho of 1, then for every percentagepoint increase in interest rates, the value of the option increases 1%.
BREAKING DOWN 'Rho'
In mathematical finance, quantities that measure the price sensitivity of a derivative to a change in an underlying parameter are known as "the Greeks." The Greeks are important tools in risk management as they allow a manager, trader or investor to measure the change in value of an investment or portfolio to a small change in a parameter. More importantly, this measurement allows the risk to isolated, thus allowing a manager, trader or investor to rebalance the portfolio to achieve a desired level of risk relative to that parameter. The most common Greeks are delta, gamma, vega, theta and rho.
Rho Calculation and Rho In Practice
The exact formula for rho is complicated, but it is calculated as the first derivative of the option's value with respect to the riskfree rate. Rho measures the expected change in an option's price for a 1% change in U.S. Treasury bill's riskfree rate. For example, assume that a call option is priced at $4 and has a rho of 0.25. If the riskfree rate rises 1%, say from 3% to 4%, the value of the call option would rise from $4 to $4.25.
Call options generally rise in price as interest rates increase and put options generally decrease in price as interest rates increase. Thus, call options have positive rho, while put options have negative rho. As another example, assume that put option is priced at $9 and has a rho of 0.35. If interest rates were to decrease from 5% to 4%, then the price of this put option would increase from $9 to $9.35. In this same scenario, assuming the call option mentioned above, its price would decrease from $4 to $3.75.
Rho is larger for options that are inthemoney and decreases steadily as the option changes to become outofthemoney. Also, rho increases as time to expiration increases. Longterm equity anticipation securities (LEAPs), which are options that generally have expiration dates at least two years away, are far more sensitive to changes in the riskfree rate and thus have large rho than shorterterm options.
Though rho is a primary input in the Black–Scholes optionspricing model, a change in interest rates generally has a minor overall impact on the pricing of options. Because of this, rho is usually considered to be the least important of all the option Greeks.

Greeks
Dimensions of risk involved in taking a position in an option ... 
Vega
The measurement of an option's sensitivity to changes in the ... 
Lambda
The ratio of the percentage change in an option contract's price ... 
Theta
A measure of the rate of decline in the value of an option due ... 
Option Premium
1. The income received by an investor who sells or "writes" an ... 
Exotic Option
An option that differs from common American or European options ...

Trading
The Anatomy of Options
Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio. 
Trading
Options Greeks
Get to know the essential risk measures and profit/loss guideposts in options strategies. 
Trading
Getting Acquainted With Options Trading
Learn more about stock options, including some basic terminology and the source of profits. 
Trading
Getting To Know The "Greeks"
Understanding price influences on options positions requires learning about delta, theta, vega and gamma. 
Trading
How to Make Money by Trading Index Options
Index options are less volatile and more liquid than regular options. Understand how to trade index options with this simple introduction. 
Investing
Why Options Trading Is Not for the Faint of Heart
Trading options is not easy and should only be done under the guidance of a professional.

Do you have to be an expert investor to trade put options?
Learn about investing in put options and the associated risks. Explore how options can provide risk, which is precisely defined ... Read Answer >> 
Are put options more difficult to trade than call options?
Learn about the difficulty of trading both call and put options. Explore how put options earn profits with underlying assets ... Read Answer >> 
Are there any risks involved in trading put options through a traditional broker?
Explore put option trading and different put option strategies. Learn the difference between traditional, online and direct ... Read Answer >> 
Should I buy options that are in the money or out of the money?
Choosing which specific option to buy can often be a complicated process, and there are literally hundreds of optionable ... Read Answer >>