Other things held constant, the value of an option depends on the stock's price, the risk-free rate, and the
A)Strike price.
B)Variability of the stock price.
C)Option's time to maturity.
D)All of the above.
E)None of the above.

Question

Quizplus · Accepted Answer

The value of an option depends on the stock price, as the option gives the holder the right to buy or sell the underlying asset at a certain price. The strike price is the price at which this transaction can occur, so it also affects the option's value. The variability of the stock price, measured by its volatility, affects the likelihood that the stock price will move above or below the strike price, thus affecting the option price. Finally, the option's time to maturity determines how long the holder has to exercise their right, which affects the probability of the stock price moving favorably for the holder. Therefore, all of these factors - stock price, strike price, stock price variability (volatility), and time to maturity - affect the value of an option.

Other Things Held Constant, the Value of an Option Depends