Explain How Implied Volatility Affects the Magnitude of the Premium Difference.
Implied volatility (IV) generally increases the time value component of all options. However, it disproportionately affects the options with the highest time value (ATM/NTM).
As IV rises, the premium of OTM options will increase more significantly in percentage terms than the premium of deep ITM options, which are dominated by intrinsic value. This increases the overall premium magnitude for all options.
Glossar
High IV Environment
Condition ⎊ A High IV environment signifies market conditions characterized by elevated implied volatility (IV) across option contracts.
Time Value
Component ⎊ Time value, also known as extrinsic value, is a component of an option's premium that reflects the probability of the underlying asset's price moving favorably before the option expires.
Implied Volatility
Expectation ⎊ This value represents the market's consensus forecast of future asset price fluctuation, derived by reversing option pricing models using current market premiums.
Intrinsic Value Component
Value ⎊ The Intrinsic Value Component, within the context of cryptocurrency derivatives, options trading, and broader financial derivatives, represents the portion of an instrument's price attributable to underlying asset fundamentals, distinct from speculative premiums or extrinsic factors.