Implied Volatility and Option Pricing Analysis

Very Hard Option Valuation Implied Volatility

Consider a European call option on a stock currently trading at $50, with a strike price of $55 that expires in 6 months. The risk-free rate is 2%, and the underlying stock has an implied volatility of 30%. An analyst uses the Black-Scholes model to calculate the theoretical price of the option, which is found to be $2.50. Recently, the market price of this call option increased to $2.75. Given this information, determine the most appropriate inference regarding the implied volatility.

The implied volatility must have increased since the market price of the option is above the theoretical price.

The implied volatility has decreased, indicating a drop in expected future volatility of the underlying.

The implied volatility remains unchanged, as the option price moved within the range of theoretical pricing.

Hint

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