Why Do OTM Options Benefit More from an Increase in IV than ATM Options?
OTM options benefit more from an increase in Implied Volatility (IV) because they are composed entirely of time value, which is directly linked to IV. A higher IV increases the perceived probability of the OTM option moving ITM before expiration.
While ATM options also benefit, their price is already relatively high, and the percentage increase in premium due to IV is often more pronounced for the cheaper OTM options.
Glossar
OTM Options Benefit More
Leverage ⎊ OTM Options Benefit More from favorable price movements due to their significantly higher inherent leverage compared to At-the-Money or In-the-Money contracts.
Buying OTM Options
Rationale ⎊ Buying OTM options in cryptocurrency derivatives represents a strategic positioning predicated on a low-probability, high-reward scenario, often employed when anticipating significant volatility or a substantial directional move beyond current market expectations.
OTM Options
Option ⎊ An options contract, within the cryptocurrency derivatives space, represents a financial agreement granting the holder the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset ⎊ typically a cryptocurrency or token ⎊ at a predetermined price (the strike price) on or before a specific date (the expiration date).
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.