Why Does an ITM Option Have a Higher Premium Compared to an OTM Option with the Same Expiration?
An ITM option has a higher premium primarily because it possesses intrinsic value, which is the immediate, non-zero profit upon exercise. OTM options have zero intrinsic value, meaning their premium is solely time value.
Since the ITM option's premium includes both intrinsic value and time value, it will always be greater than the OTM option's premium, which only contains time value.
Glossar
OTM Option
Definition ⎊ An OTM option, or out-of-the-money option, is a derivative contract where the strike price is unfavorable relative to the current market price of the underlying asset.
Intrinsic Value
Valuation ⎊ This represents the in-the-money amount of an option, calculated as the difference between the spot price and the strike price, if positive, otherwise zero.
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.
ITM Option
Intrinsic Value ⎊ An ITM option, within cryptocurrency derivatives, possesses an intrinsic value stemming from the difference between the underlying asset’s current market price and the option’s strike price, representing immediate profitability if exercised.