Suppose you had bought a put option on Tesla stock on February 1, 2021 with an expiration date of March 18, 2021, paying a premium of $10. Today, February 23, 2021, you observe in the financial tables that the premium for your put option has increased to $12. Give three reasons why the premium might have increased.

 

Answer:

1. Reduction in stock price of Tesla

2. Stock Volatility has increased

3. Interest Rates have reduced

Step-by-step explanation

Premium of put option depends on following factors:

1.) Lower the spot price, higher the premium of put option. 

2.) Higher the volatility of the stock, higher is the premium for the option because higher volatility increases both up potential and down potential

3.) Put option premium is inversely proportional to interest rate. Put option are substitute of shorting shares. When investor short shares they get cash in their account which earns interest, however when investor buys put option they don't get cash in their account, hence losing out on interest. This makes buying put options less attractive when interest rate rises. Conversely, when interest rates fall, shorting shares becomes less attractive as extra cash won't be making as much interest revenue, hence demand for put option rises with its premium