Why Do ATM Options Have the Highest Extrinsic Value?
At-the-Money (ATM) options have the highest extrinsic value because they represent the point of maximum uncertainty for the option's expiration outcome. With the spot price near the strike price, the probability of the option expiring ITM or OTM is roughly 50/50, which gives it the greatest potential for large price movement in either direction, maximizing its time value.
Glossar
Extrinsic Value
Volatility ⎊ This component represents the portion of an option's premium driven by market uncertainty regarding the underlying crypto asset's future price movement.
Highest Extrinsic Value
Valuation ⎊ Highest extrinsic value, within cryptocurrency options and derivatives, represents the portion of an option’s premium attributable to time to expiration and volatility expectations, exceeding the intrinsic value derived from the immediate exercise price difference.
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.