How Does Implied Volatility Affect the Time Value of an Option?
Implied volatility (IV) is a market's expectation of how much the underlying asset's price will fluctuate in the future. Higher IV increases the probability of the option becoming in-the-money before expiration.
Therefore, higher IV directly increases the option's time value (extrinsic value). Conversely, lower IV decreases time value.
Glossar
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Intrinsic Value
Valuation ⎊ This represents the in-the-money amount of an option, calculated as the difference between the spot price and the strike price, if positive, otherwise zero.
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.