The value of the put option rises when the underlying asset
A) experiences price increases.
B) experiences price declines.
C) experiences reduced volatility.
D) has a relatively short maturity.

Question

Quizplus · Accepted Answer

A put option gives the holder the right to sell the underlying asset at a predetermined price (strike price) before the expiration date. Therefore, if the underlying asset experiences a price decline, the option becomes more valuable because it allows the holder to sell the asset at a higher price than the current market price. On the other hand, if the asset experiences price increases, the option becomes less valuable as it is cheaper to purchase the asset on the market instead of exercising the option. Reduced volatility or a short maturity would not necessarily affect the value of the put option.

The Value of the Put Option Rises When the Underlying