An option premium is normally a positive function of:
A) the traded volume
B) the historical volatility of the price of the underlying commodity
C) the style (European or American) of the option
D) the implied volatility of the price of the underlying

Question

Quizplus · Accepted Answer

Option premium is normally a positive function of the implied volatility of the price of the underlying. Implied volatility is the expected future volatility of the underlying asset, which is derived from the market prices of options on that asset. Higher implied volatility implies higher uncertainty about the future price of the underlying asset, which increases the probability that the option will be exercised and hence increases the option premium.

An Option Premium Is Normally a Positive Function Of