Explain how the time to expiration, volatility, and price of the underlying stock impact but put...

Explain how the time to expiration, volatility, and price of the underlying stock impact but put and call options prices.

Expert Solution

1. Time to expiration- whenever there will be a higher time to expiration, it will be impacting both the call option as well as put option positively, as when there would be a higher time of expiration, the value of call option and put option will be higher and if the time to expiration is declining,then it would be leading to decline of value of call option and put option

2. Volatility- volatility will also have a positive impact on the value of both call option and put option because when there would be a higher volatility and the probability of achieving the strike price will be higher,then the prices of call option as well as put option will be here and there would be a lower volatility the prices of call option and put option will be falling.

3. Underlying stock price- when the underlying stock price will be increasing, it will mean that call option will be increasing and the put option will be decreasing whereas, if the underlying stock price is decreasing, it will mean that the call option will be decreasing and the put option will be increasing so put option will be having an inverse relationship with the underlying stock price whereas call option will be having a direct and linear relationship with the stock price.

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