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The Role of Rho

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The past few years, the Federal Reserve has begun raising interest rates. As the Black-Scholes Option Pricing Model explains, interest rates are a primary component for pricing options.

This piece explores Rho, the Greek which explains the sensitivity of an option price to changes in interest rates.

We look at the Rho values for call options of different strike prices and expirations. In the money options with long maturities have the largest sensitivity to changes in interest rates.

With tastytrade mechanics, we typically look for out of the money options with around 45 days to expiration. The impact of rate increases (which are normally 25 basis points at a time) do not significantly impact option prices when trading they tastytrade way.

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