New Tek announces a major expansion which causes the price of its stock to increase and also causes an increase in the volatility of the stock price.How will these two reactions affect the value of put options on this stock?
A)Both reactions will decrease the value.
B)Both reactions will increase the value.
C)Neither reaction will affect put option values.
D)The reactions will have offsetting effects on the value.
E)The change in volatility will have no effect while the increased stock price will decrease the value.

Question

Quizplus · Accepted Answer

The increase in stock price generally decreases the value of put options, as put options become less valuable when the underlying stock price rises. However, an increase in volatility generally increases the value of options, including put options, because higher volatility increases the potential for the stock to move in a favorable direction for the option holder. Thus, these two effects offset each other.

New Tek Announces a Major Expansion Which Causes the Price