NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Understanding Derivatives

In the context of option pricing, which factor, when increased with all else constant, increases the premium of both call and put options on a stock?

Higher volatility of the underlying increases the premium of both calls and puts, because greater expected price swings raise the chance of a profitable payoff for either option type, while the other listed factors affect calls and puts differently or reduce both.

AVolatility of the underlying stockCorrect
BTime remaining to expiry is shortened
CRisk-free interest rate
DStrike price

Explanation

Higher volatility raises the chance of large price moves, increasing the value of both calls and puts. Shortening time reduces both premiums. Higher interest rates raise calls and lower puts, and a higher strike raises puts but lowers calls.

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