Impact of Implied Volatility on Call Option Pricing

Hard Option Valuation Implied Volatility

In an options market scenario, you are analyzing a call option with a strike price of $50 that expires in 30 days. The current stock price is $50, and the market data indicates that the implied volatility of the option is 20%. You observe that several market participants have different views on the expected stock price movements. One participant believes that due to an upcoming earnings announcement, the stock price may demonstrate more volatility than what is currently implied by the market. Another participant believes that the stock will remain stable. Considering these varied perspectives, which statement best summarizes the potential implication of a higher implied volatility on the call option price?

A higher implied volatility leads to a higher call option price, all else being equal, due to increased uncertainty in the stock's potential future price.

A higher implied volatility does not affect the call option price since the option's intrinsic value is determined solely by the stock price in relation to the strike price.

A higher implied volatility decreases the call option price because it suggests that the stock price is likely to be less predictable.

Hint

Submitted8.9K

Correct5.6K

% Correct62%