The Effect of Stock Volatility

The Effect of Stock Volatility

The effect on a pat's price is the same as that for a call: Higher volatility increases the possible gains for a put holder. This is because greater volatility increases the gains on the put if the stock price increases, because the stock price can drop below the exercise price by a larger amount. On the other hand, greater volatility means that if the stock price goes up, it can also be much higher than the exercise price. To a put holder, however, this does not matter because the potential loss is limited, it is said to be truncated at the exercise price.