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Ever wonder why an option premium increases with an increase in volatility and vice versa?

Option prices (premium) are determined by a number of factors. Volatility is one of those factors.


If volatility increases (due to expected erratic movement in the stock), it will help bump up the option’s price.


If volatility decreases (due to expected subdued movement in the stock), it will help bring down an option’s price.


Volatility is a measurable creature, and swings higher and lower throughout the life of an option, hence, it has a direct effect on the option’s price.

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