Series 7 practice questionmediumOptions — Volatility Impact
An increase in implied volatility of the underlying stock would have what effect on option premiums?
- ACall premiums increase, put premiums decrease
- BCall premiums decrease, put premiums increase
- CBoth call and put premiums decrease
- DBoth call and put premiums increase✓ Correct answer
Explanation
Why D — Both call and put premiums increase
Higher implied volatility increases the premiums of both calls and puts because there is a greater probability that the option will finish in-the-money. Volatility measures the expected magnitude of price swings — larger expected swings make all options more valuable regardless of direction.
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