Chapter 06 · Section 6.1

Long Put

Now that we know that the call buyer is willing to pay more money for a option on a stock with increased volatility and the writer is able to demand a higher premium. What effect does volatility have on put options?

Consider a change in volatility from 20% to 25%. The profit potential of a put holder is?

• a) unchanged.
  No. Volatility is one of the key determinants of options pricing it must therefore have an effect on the profit for the put holder.
  b) increased.
  c) decreased.

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