Question

You look at the options quotes written on your favorite stock when information about it occurs on the market. What types of announcements could explain that: a). call prices go up while put prices go down? b). call prices fall while put prices rise? c) the prices of puts and calls increase simultaneously?  

Answer 1

a) Call prices go up while put prices go down: A positive announcement is going to make the stock price to increase. So, the call prices go up while the put prices go down.

b) Call prices fall while put prices rise: A negative announcement is going to make the stock price to decrease. So, the call prices go down while the put prices go up.

c) The prices of puts and calls increase simultaneously: An announcement that leads to the uncertainty of the stock price makes the implied volatility of both call and put options to increase leading to an increase in the call and put prices. Example: A drug company has applied for FDA approval. The results are due next week. If the drug is approved, the stock price is going to increase and if the drug is not approved then the stock price goes down. This uncertainty causes both the call and put option to increase in value simultaneously.