Does Theta Decay Affect ITM Options Differently than OTM Options?
Yes, Theta decay affects them differently. For OTM options, Theta decay causes the entire premium to erode towards zero.
For ITM options, Theta decay causes the premium to erode towards its intrinsic value. While the absolute dollar decay may be highest for ATM/NTM options, the percentage decay is often highest for OTM options, as their value is 100% time value.
Glossar
ITM Options
Option ⎊ In cryptocurrency derivatives, an in-the-money (ITM) option represents a contract where the strike price is favorable to the holder relative to the current market price of the underlying asset.
Theta Decay
Time Decay Quantification ⎊ Theta measures the rate at which an option's value decays due to the passage of time, representing the daily loss in extrinsic value for the option holder, assuming no change in the underlying price or volatility.
Absolute Dollar Decay
Decay ⎊ The concept of Absolute Dollar Decay (ADD) within cryptocurrency derivatives signifies the erosion of notional value independent of price fluctuations, primarily impacting options and perpetual futures contracts.
Intrinsic Value
Valuation ⎊ This represents the in-the-money amount of an option, calculated as the difference between the spot price and the strike price, if positive, otherwise zero.