Problem
You're pricing a European option on a non-dividend-paying stock. The trader next to you shouts a series of market moves and wants to know, instantly, whether your option's price goes up, down, or is ambiguous.
Consider both a European call and a European put. For each of the following changes, state the directional effect on the option price (increase, decrease, or ambiguous) and give a one-line justification.
The Parameters
- Spot price increases
- Strike price increases
- Risk-free rate increases
- Volatility increases
- Time to maturity increases