Assume the standard deviation of the returns on ABC stock increases. This change will ________ the value of the call options and ________ the value of the put options on ABC stock.
A) increase; decrease
B) increase; increase
C) decrease; decrease
D) decrease; increase
E) not effect; not effect

Question

Quizplus · Accepted Answer

An increase in the standard deviation (volatility) of the returns on a stock increases the value of both call and put options. This is because options are more valuable when the underlying stock is more volatile, as there is a greater chance of the option ending in the money.

Assume the Standard Deviation of the Returns on ABC Stock