Tele-Tech Com announces a major expansion into internet services. This announcement causes the price of Tele-Tech Com stock to increase, but also causes an increase in price volatility of the stock. Which of the following correctly identifies the impact of these changes on the put option of Tele-Tech Com?
A) Both changes cause the price of the put option to decrease.
B) Both changes cause the price of the put option to increase.
C) The greater uncertainty will cause the price of the put option to decrease. The higher price of the stock will cause the price of the put option to increase.
D) The greater uncertainty will cause the price of the put option to increase. The higher price of the stock will cause the price of the put option to decrease.
E) The greater uncertainty has no direct effect on the price of the put option. The higher price of the stock will cause the price of the put option to decrease.

Question

Quizplus · Accepted Answer

The price of a put option increases with greater uncertainty or volatility in the stock price because there's a higher chance the stock will drop below the strike price, making the option more valuable. However, as the stock price increases, the value of a put option (which benefits from a decrease in the stock price) generally decreases.

Tele-Tech Com Announces a Major Expansion into Internet Services