If the volatility (variance) of the underlying stock increases then the: [Assume everything else remaining the same]
A) Value of the put option increases and that of the call option decreases
B) Value of the put option decreases and that of the call option increases
C) Value of both the put option and the call option increases
D) Value of both the put option and the call option decreases

Question

Quizplus · Accepted Answer

When the volatility of the underlying stock increases, the value of both the put option and the call option increases. This is because the likelihood of the stock price moving significantly in either direction (up or down) increases, resulting in a higher probability of the option being exercised, which increases its value.

If the Volatility (Variance) of the Underlying Stock Increases Then