Option premiums fall as the volatility of the underlying asset falls.

Question

Quizplus · Accepted Answer

Option premiums are affected by many factors, including volatility. When the volatility of the underlying asset falls, the potential for large price swings decreases, which leads to a reduction in the expected magnitude of price movements. As a result, option buyers are less willing to pay high premiums for the right to buy or sell the underlying asset. Consequently, option premiums tend to fall when volatility decreases.

Option Premiums Fall as the Volatility of the Underlying Asset