Question

. Why does the value of a put option increase when the volatility of the underlying stock increases?

. What is the impact of leverage in option trading?

Answer 1

Part 1:
Volatility increases the potential of a stock to move in both up and down directions. So, options value increases when volatility increases (because the uncertainty of price movement increases). It is applicable for both call option and put option. The value of both put and call option increases when volatility increases.

Part 2:
Options are contracts and to buy contracts we do not have to pay the full amount (like we pay while buying stocks). We pay a certain percentage of the total option value to buy options. This is called as buying on margin (or leverage). Leverage magnifies the returns in options trading and impacts the profits and losses of an option trader.