Impact of Implied Volatility on Option Pricing

Very Hard Option Valuation Implied Volatility

Consider a European call option on a stock currently priced at $100. The option has a strike price of $110 and expires in 6 months. The risk-free rate is 2% per annum, and the stock's implied volatility is derived from the Black-Scholes model.

You are given the following scenarios regarding the implied volatility:

The implied volatility of 20% is considered low compared to market expectations.
The implied volatility of 30% reflects the market's anticipation of increased volatility due to upcoming earnings announcements.
The implied volatility of 45% is observed immediately after a negative earnings surprise.

Which of the following statements regarding the impact of implied volatility on the option pricing is most accurate?

A higher implied volatility leads to a higher theoretical call option price, benefiting holders.

Lower implied volatility increases the probability of the option being exercised.

Implied volatility has no effect on the intrinsic value of the option but impacts the extrinsic value.

Hint

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