How Does High Volatility Affect the ‘Theta’ of an Option?
High volatility generally leads to a lower Theta (time decay) for both Call and Put options. This is because high volatility increases the option's extrinsic value (time value), which decays more slowly than the intrinsic value.
The higher the chance of a large price move (high volatility), the more value the option retains over time.
Glossar
High Volatility
Dispersion ⎊ High volatility within cryptocurrency, options, and derivatives signifies an expanded range of potential price movements over a given period, reflecting heightened market uncertainty and risk.
Extrinsic Value
Volatility ⎊ This component represents the portion of an option's premium driven by market uncertainty regarding the underlying crypto asset's future price movement.
Volatility
Measurement ⎊ Volatility, in quantitative finance, is the statistical measurement of the dispersion of returns for a given financial asset, typically quantified by the annualized standard deviation of its price movements.