Question

The greater the volatility, the greater the risk. Because investors are risk averse, if volatility increases, investors will value option less.

True

False

Answer 1

Solution :

False is the right answer.

Reason/Justification :

This is because Investors will value Options more when the volatility increases.

Higher volatility increases the movement of the asset in both the upside and downside direction.

Put option increases in value when the market goes down and the Call option increases in value when the market goes up.

Put Options give the holder the right to sell the underlying asset at a pre-determined price when the market or the asset price goes down tending to benefit from the downfall.

Call options give the holder the right to buy but not the obligation to purchase the underlying asset at a pre determined price.

The call option enables the holder of the option to purchase the stock at a lesser price when the asset price goes up drastically.

Hence the option price of either call or put increases when the volatility goes up.