How Does High Implied Volatility Affect the Theta (Time Decay) of OTM Options?

High implied volatility (IV) increases the Theta (time decay) of OTM options. While it seems counterintuitive, high IV increases the option's extrinsic value, and Theta is the rate at which this extrinsic value erodes.

Therefore, a higher IV leads to a higher amount of time value to decay, resulting in a higher Theta magnitude (more negative). This effect is most pronounced near ATM, but it also applies to OTM options.