This week's question:
DATE: November 20, 2015
Why would a call option go down in price when the underlying asset goes up in price?
While there are six factors that can influence an option's price, the top three include the stock price, time decay and the level of expected volatility. Typically, an investor would expect the call price to go up when the stock price goes up; however, in this scenario the call option goes down. One possible reason is that the impact of time decay could simply be greater than the impact of the rising stock price over the life of the option. Therefore, the price of the call could go down as the stock price rises. Another possible answer is the impact of volatility. When implied volatility increases, the price of options increase. Conversely, if implied volatility decreases, the price of an option decreases. To learn more about the impact of time decay and implied volatility on option prices, view this segment of "Ask the Institute."