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.
• b) increased.
  Yes. As a result of the increase in volatility investors are willing to pay more for the option. The speculator could then profit by selling the option in the market. Continue
  c) decreased.

(Click here for help)