The value of an option (both call and put) is positively related to:
I. volatility of the underlying stock price
II. time to expiration
III. risk-free rate
A) I and II only
B) II and III only
C) I and III only
D) III only

Question

Quizplus · Accepted Answer

I. Volatility of the underlying stock price affects the probability of the option ending up in the money, and thus affects its value.
II. Time to expiration allows for more time for the underlying stock price to move in the desired direction, increasing the probability of the option ending up in the money.
III. Risk-free rate affects the present value of the option, but its relationship with the option value is not as strong as the relationships with volatility and time to expiration.

The Value of an Option (Both Call and Put) Is