Question

Suppose you bought a put option on Apple stock on February 1, 2020 with an expiration date of August 1,2020, paying a premium of $3 per share for the option. On May 1, 2020 the price or premium of this option is $5 per share. Give three reasons why the price rose and explain why each reason would cause the price of the option to rise.

Answer 1

The price of the put option increases because of the following :

1. Decrease in the spot price : A decrease in the spot price makes the put option more attractive. because now the stock can be sold at a higher price than it is in the market.

2. Decrease in Interest rates : An change in the interest rates affect the option prices. if the interest rates decrease from Feb,1 to May,1 , the put option price increases. Decreased Interest rates causes the expected future spot price to decrease thereby increasing the put option price.

3. Increase in volatility of Stock: When the stock prices become more volatile, it gives incentive to hold the option and the option premium increases, because the stock prices move more, and thereby giving an incentive to the option holder