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

Question

Quizplus · Accepted Answer

A reduction in the expected short-term volatility of the stock price would lead to a decrease in the uncertainty around the stock price movement, which would result in a decline in the premium on an existing put option. Therefore, the correct answer is B - decline. Option A is incorrect since a negative premium does not make sense. Option C is incorrect because the premium on the put option would increase if there is an increase in volatility. Option D is incorrect since the premium is likely to be affected by changes in volatility. Finally, option E is partially correct but not the best choice, as it includes option A, which is incorrect.

The Premium on an Existing Put Option Should ____ When