How Does the ‘Square Root of Time’ Rule Apply to Options Pricing?

The 'square root of time' rule is a principle derived from the Black-Scholes model, stating that the volatility of an asset's price movement scales with the square root of time. In options pricing, this means that an option with four times the time to expiration will have twice the expected volatility, and thus a significantly higher extrinsic value.

This rule highlights the non-linear relationship between time and an option's premium, explaining why the extrinsic value decay is faster closer to expiration.