Which one of the following statements concerning the relationship between the volatility of the underlying stock price,as measured by sigma (σ),and call and put prices is correct?
A) Call and put prices react fairly similarly in response to changes in sigma.
B) Call prices increase and put prices decrease as sigma increases.
C) Put price increase and call prices decrease as sigma increases.
D) Call prices increase and put prices remain relatively constant and sigma increases.
E) Neither put nor call prices are affected by changes in sigma.

Question

Quizplus · Accepted Answer

Both call and put option prices increase as the volatility (sigma) of the underlying stock increases, because higher volatility increases the potential for the option to end up in-the-money.

Which One of the Following Statements Concerning the Relationship Between