Which one of the following statements concerning the relationship between the volatility of the underlying stock price, as measured by sigma (σ), and call and put prices is correct?
A)Call and put prices react fairly similarly in response to changes in sigma.
B)Call prices increase and put prices decrease as sigma increases.
C)Put prices increase and call prices decrease as sigma increases.
D)Call prices increase and put prices remain relatively constant as sigma increases.
E)Neither put nor call prices are affected by changes in sigma.

Question

Quizplus · Accepted Answer

Both call and put options are derivatives whose prices are influenced by the volatility of the underlying asset. As the volatility (sigma, σ) increases, the potential for the underlying asset to make significant moves also increases, which in turn increases the value of both call and put options. This is because both types of options benefit from increased movement: calls become more valuable as the potential for upward movement increases, and puts become more valuable as the potential for downward movement increases.

Which One of the Following Statements Concerning the Relationship Between