Question

For each event, describe what you think would happen to the premium for both an at-the-money call option and an at-the-money put option on a stock.

a. The stock’s price rapidly jumps 10%.

b. A week passes with very little change to the stock’s price.

c. The spread of COVID-19 creates high volatility for the stock (though on average the price is largely in line with the pre-COVID trend).

d. The firm issues an earnings report which has no impact on the spot price (i.e. in line with expectations).

Answer 1

1.A. At The money call option would be increasing significantly due to rise in premium and at the money put option will go down significantly due to decrease in its premium, when the stock price rise 10%.

B.When there is a week that has passed with little movement, the value of both the call option and put options will go down because there would be decrease in premium because there is lesser time left to maturity and hence lesser time left to exercise it.

C .if there is increase in volatility, premium for both call options as the put options will go very high because increase in volatility leads to increase in premiums due to higher expectations of profit due to high volatility.

D. The premium of both the options will go down significantly as there is hardly any impact on the volatility after result when announced and the position will be unwinded who were made in expectation of movement due to you result..