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.
• c) decreased.
  No. The change in volatility is an increase, therefore the profit/loss profile moves outward from the origin similar to the call.

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