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How Does the Concept of “Volatility Premium” Relate to High Theta?

The volatility premium (IV > realized volatility) is the source of high Theta, as it represents the extra extrinsic value that decays rapidly over time.
Greeks.Live24.11.25

How Does the Concept of “Volatility Premium” Relate to High Theta?

The volatility premium is the amount by which implied volatility (IV) exceeds realized (historical) volatility. This excess IV contributes directly to the option's extrinsic value.

High Theta is the rapid decay of this extrinsic value. Therefore, the volatility premium is the source of the high Theta, as it represents the extra premium that option sellers collect and that decays over time.

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