Which one of the following statements concerning option prices is correct?
A)There is a relatively linear direct relationship between the volatility of the underlying stock price and option prices.
B)Call option prices decrease and put option prices increase as the time to expiration increases.
C)Put option prices are directly related to the price of the underlying stock.
D)The relationship between option prices and stock prices is a linear relationship.
E)Delta measures the effect that the underlying stock's dividend yield has on option prices.

Question

Quizplus · Accepted Answer

Option prices generally increase with the volatility of the underlying stock because higher volatility increases the probability of the option ending in the money. This relationship is not linear but is direct, making A the correct choice.

Which One of the Following Statements Concerning Option Prices Is