Which of the following will increase the value of a put option? A. An increase in volatility B. A decrease in the exercise price C. A decrease in time to expiration The answer is A. But I also think C is correct. As C + X/(1+RFR)^T = S + P, if T decrease, X/(1+RFR)^T will increase which increase P… What’s the problem here?? Thanks
if option will expire early it will be discounted and value of the put option will decrease. and if discounted on time like european put then there will not be any diiferene.
I hope this is the answer of your question. Is there anyone has better explaination let me knw… It will be more helpfull
increased volatility will increase the value of both put and call options. two components of option value, time and intrinsic value. as time to expiration approaches more of the value is derived from intrinsic value. less time to expiration will create less opportunity for the holder to exercise the option.
A is clearly correct. The time-to-expiration is a little tricky for people who aren’t used to thinking about options. The simple explanation is that if you are thinking of an at-the-money option, more time to expiration means more time for the option to go into the money, which is valuable, and therefore paid. At Level II you’ll probably learn about “time-decay” which basically means that if you hold an option, it loses a little bit of value every day that you hold it, other things equal.
Problem with using C + X/(1+RFR)^T = S + P is that, Time to expiration affects both the value of the Call and the Put. So you cannot really tell what will happen to P when X/(1+RFR)^T goes down, since C is also going down. Trick to remember is that, longer the time horizon, the more valuable your option (both call and put) becomes. It is intuitive if you think about it.