The value of any option (both call and put options) is positively related to the
A)volatility of the underlying stock price and time to expiration.
B)time to expiration and risk-free rate.
C)volatility of the underlying stock price and risk-free rate.
D)risk-free rate.

Question

Quizplus · Accepted Answer

The value of options is influenced by several factors, but the main drivers are volatility and time to expiration. Options prices tend to increase with higher volatility and longer time to expiration because both of these factors increase the probability that the option will end up in-the-money. This relationship applies to both call and put options. Risk-free rate has some impact on option values, but its influence is not as significant as volatility and time to expiration. Therefore, option values are positively related to the volatility of the underlying stock price and time to expiration (choice A).

The Value of Any Option (Both Call and Put Options)