InvestorQ : How does volatility of the stock and the movements in the market price impact the value of the call option? Can you throw some light on that subject?

The relationship between the various variables and the value of an option is captured by the Black Scholes model. The market price obviously has a positive relationship with the call option. If Reliance CMP is Rs.920 and the Rs.925 call is quoting at Rs.12, then if the CMP goes up to Rs.925 the option will obviously go up. What about volatility? Volatility means the stock is likely to see violent fluctuations which could be on either side. If it is against the buyer then the maximum loss is anyways capped by the premium. If the volatility is favouring the buyer then the option will be profitable. That is why volatility is always favouring the call option value.

Riya Dwivedianswered.The relationship between the various variables and the value of an option is captured by the Black Scholes model. The market price obviously has a positive relationship with the call option. If Reliance CMP is Rs.920 and the Rs.925 call is quoting at Rs.12, then if the CMP goes up to Rs.925 the option will obviously go up. What about volatility? Volatility means the stock is likely to see violent fluctuations which could be on either side. If it is against the buyer then the maximum loss is anyways capped by the premium. If the volatility is favouring the buyer then the option will be profitable. That is why volatility is always favouring the call option value.