Why Do ATM Options Generally Have the Highest Time Value?
ATM options have the highest time value because they are at the inflection point where the probability of the option expiring ITM or OTM is roughly 50/50. This uncertainty creates the highest potential for future intrinsic value gain.
The market is willing to pay the most for this 'sweet spot' of uncertainty, as a small price move in either direction can quickly create intrinsic value.
Glossar
Time Value
Component ⎊ Time value, also known as extrinsic value, is a component of an option's premium that reflects the probability of the underlying asset's price moving favorably before the option expires.
ATM Options
Valuation ⎊ At-the-money (ATM) options, within cryptocurrency derivatives, represent contracts with a strike price approximating the underlying asset’s current market price, demanding precise pricing models given the volatility inherent in digital assets.
Highest Time Value
Decay ⎊ Highest Time Value, within cryptocurrency options and derivatives, reflects the exponential erosion of an option’s extrinsic value as expiration nears, driven by the diminishing probability of favorable price movement.