How Does Volatility Affect the Time Value of an Option?
Volatility is a key driver of an option's time value. Higher expected volatility in the underlying asset increases the probability that the option will move significantly in the money before expiration.
This higher probability translates to a higher time value and thus a higher option premium. The option Greek "Vega" measures an option's sensitivity to changes in volatility.
Glossar
Volatility
Measurement ⎊ Volatility, in quantitative finance, is the statistical measurement of the dispersion of returns for a given financial asset, typically quantified by the annualized standard deviation of its price movements.
Historical Volatility
Evidence ⎊ This metric is derived from the time-series of past asset prices, representing the actual realized dispersion of returns over a defined historical window.
Time Value
Duration ⎊ The temporal dimension inherent in cryptocurrency derivatives, options trading, and financial instruments fundamentally defines time value.
Option Strategy
Construction ⎊ This involves the precise combination of long and short calls and puts, along with their respective strikes and maturities, to achieve a desired risk-reward profile.
Expected Volatility
Projection ⎊ Expected volatility, within cryptocurrency options and derivatives, represents a forecast of future price fluctuations, derived from market prices of options contracts and statistical models.
In the Money
Valuation ⎊ In the context of cryptocurrency derivatives, ‘In the Money’ signifies a derivative contract possessing intrinsic value, where the underlying asset’s price exceeds the strike price for call options, or falls below for put options, creating a positive carry.