How Does Theta Impact OTM Options Differently than ITM Options? ⎊ Path

How Does Theta Impact OTM Options Differently than ITM Options?

Theta decay is generally more damaging to OTM options because their entire value is extrinsic (time value), which Theta erodes. ITM options, while still subject to Theta decay on their extrinsic component, have an intrinsic value that is immune to time decay, providing a floor to their total value.

Therefore, OTM options lose a higher percentage of their total value to Theta over time.

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Glossar

OTM Options

Valuation ⎊ Out-of-the-money options, within cryptocurrency derivatives, represent contracts with a strike price distant from the current market price of the underlying asset, implying a low probability of intrinsic value at expiration.