Actuarial Outpost November 2000 #25
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#1
05-02-2004, 03:49 PM
 dion Member Join Date: Apr 2003 Posts: 71
November 2000 #25

"As price volatility increases, call option prices rise, and put option prices fall." The answer key says this statement is false - as price volatility rises, both call and put option prices rise.

I thought if there is an increase in the volatlity of the stock price then the change in call price is postive and the change in put price is negative.

#2
05-02-2004, 03:54 PM
 Svak Member Join Date: Jun 2002 Location: Lost Posts: 150
November 2000 #25

You agree to the following (in red) :

I thought if there is an increase in the volatlity of the stock price then the change in call price is postive and the change in put price is negative.

Use put-call parity equation to figure out what will happen to put if increased variability increases call value.
#3
05-02-2004, 03:59 PM
 p&cnewbie Member Join Date: Jun 2003 Posts: 507

The price of a put and a call increase with volatility. There's a good explanation in the footnote on Pg 600 of Chapter 20 in B&M. It talks about how a stock price follows a random walk, so you have good chances to make profits with options when the underlying stock has high volatility.
#4
05-03-2004, 12:16 PM
 dion Member Join Date: Apr 2003 Posts: 71

This is what I had in some notes I had put together. Please let me know if this looks incorrect. Thanks!

Increase in Variables Chg to CallP Chg to PutP
Stock Price + -
Excercise Price - +
Interest Rate + +
Time to Expiration + +
Volatility of Stock Price + -
Cash Dividend - +
#5
05-19-2004, 01:43 AM
 Cats Member Join Date: Jan 2004 Posts: 47

Quote:
 Originally Posted by dion This is what I had in some notes I had put together. Please let me know if this looks incorrect. Thanks! Increase in Variables Chg to CallP Chg to PutP Stock Price + - Excercise Price - + Interest Rate + + Time to Expiration + + Volatility of Stock Price + - Cash Dividend - +
Shouldn't the signs for Volatility be " + +"?!

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