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Learn With ETMarkets: Options Demystified 303 – Options Greeks (Part 3)
Interest rates and volatility are two critical factors that impact option prices. Risk-free interest rates lead to higher prices for purchasing options, increasing their cost. Rho, a Greek letter, measures an option's price sensitivity to changes in interest rates. Volatility refers to the degree of variation and unpredictability in an asset's price over time. Vega, another Greek letter, measures the sensitivity of an option's price to changes in the volatility of the underlying asset. Traders utilize vega or volatility in their strategies and create delta-neutral portfolios by pairing long and short options positions to minimize or neutralize overall vega exposure.