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.[5] The stock’s price rapidly jumps 10%

b.[5] A week passes with very little change to the stock’s price.

c.[10] 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.[Extra Credit, 5] The firm issues an earnings report which has no impact on the spot price (i.e. in line with expectations).

Please answer all parts and show work! Need ASAP

Answer 1

5.a. If stocks jumps 10%, the value of in the money call option would spike significantly and the value of in the money put option would fall significantly as the stock jump on the upside means that there is gaining on the upside and it will be dent to the emotions of people who are in the shorter side.

5.b.if a week pass without any change in the share price, then the value of both in the money call money option and in the money put option would decrease as there would be lesser time to expire for both the options.

5.c) the rising volatility is a good thing for option pricing so the rise in volatility would change the value of in the money call option and in the money put option on the higher side and they will both gain.

5.d) if the firm announces it's earnings, and it does not have any impact on the prices then the value of both the in the money call option and in the money put option would decrease significantly as there would be a lot of unwinding in both the options as it didn't react according to the expectation and it will come down.