How Does Implied Volatility Impact the Time Value Component of an Option?

Implied volatility (IV) is a major component of an option's time (extrinsic) value. Higher IV suggests that the market expects larger price swings in the underlying asset.

This increased uncertainty and potential for profit lead to a higher option premium, thus increasing the time value. While Theta measures the decay of time, higher IV effectively inflates the total amount of time value available to decay.