The premium on an existing call option should ____ when there is a reduction in the expected short-term volatility of the stock price.

Question

Quizplus · Accepted Answer

When there is a reduction in the expected short-term volatility of the stock price, the premium on an existing call option should decline. This is because the probability of the stock price rising sharply in a short period of time decreases, reducing the potential payoff for the buyer of the call option and therefore reducing the value of the option.

The Premium on an Existing Call Option Should ____ When