How Does Delta Affect the Theta of an Option?
Delta and Theta are related, particularly through the concept of moneyness. Options with a Delta near 0.5 (ATM) have the highest absolute Theta.
As Delta moves towards 1 (deep ITM) or 0 (deep OTM), the absolute Theta decreases. This is because high Delta options are mostly intrinsic value, and low Delta options have little time value left, whereas ATM options are pure time value.
Glossar
ATM Options
Valuation ⎊ At-the-money (ATM) options, within cryptocurrency derivatives, represent contracts with a strike price approximating the underlying asset’s current market price, demanding precise pricing models given the volatility inherent in digital assets.
Delta near 0.5
Sensitivity ⎊ The delta, representing the rate of change of an option's price relative to a one-unit change in the underlying asset's price, approaching 0.5 signifies a position exhibiting moderate directional exposure.
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.
Theta
Decay ⎊ Theta, within cryptocurrency options and financial derivatives, quantifies the rate of extrinsic value loss as time passes, representing a critical component of options pricing models.
Absolute Theta
Concept ⎊ The measure of time decay, or Theta, expressed in absolute monetary terms rather than as a percentage of the asset price, provides a direct quantification of the daily erosion of an option's extrinsic value.
Delta Hedging
Framework ⎊ Delta hedging, within cryptocurrency derivatives, represents a dynamic risk management strategy designed to neutralize the directional exposure arising from options positions.