You currently own both a call option and a put option on the same stock. Explain what will happen to the prices (values) of both options given the following changes, and justify your reasons. Consider each change as independent of the other changes.

You currently own both a call option and a put option on the same stock. Explain what will happen to the prices (values) of both options given the following changes, and justify your reasons. Consider each change as independent of the other changes.

You currently own both a call option and a put option on the same stock. Explain what will
happen to the prices (values) of both options given the following changes, and justify your
reasons. Consider each change as independent of the other changes.
a.

The price of the underlying stock decreases.

Answer
when the underlying stock decrease, the call option should decrease in
value as well because the payoff to call will decease; conversely, the put
option would increase.
b.
The time to maturity of the option nears.

Answer
short time to maturity would result in decrease the values of call and put
options because there is shorter time for future event to affect prices, and
the range of likely stock prices decrease.
c.
The underlying stock becomes more volatile.

Answer
The call and put options values would increase when there is more volatile
of the underlying stock due to higher predicted prices fluctuation.
d.

The underlying stock increases its dividends.

Answer
a higher the dividends must lower expected rate of capital gain, which
would result of lowering the call option; while the Put option will increase.


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