How Does Implied Volatility Affect the Rate of Theta Decay?
Higher implied volatility (IV) increases the option's premium, meaning it has more time value to lose. Therefore, options with high IV will generally have a higher absolute theta (a larger daily decay amount) than options with low IV, all else being equal.
This means the hedge is more costly to hold.
Glossar
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.
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.
Crypto Options
Valuation ⎊ Crypto options, representing rights ⎊ not obligations ⎊ to buy or sell a cryptocurrency at a predetermined price before an expiration date, derive valuation from underlying asset price, time to expiry, volatility, and prevailing risk-free interest rates; models like Black-Scholes, adapted for crypto’s unique characteristics, are frequently employed, though parameter estimation presents challenges due to nascent market data and potential for manipulation.