Why Is the Extrinsic Value Highest for ATM Options?
The extrinsic value is highest for ATM options because they have the highest uncertainty regarding their final outcome. ATM options are precisely at the point where the underlying price can move either way, making them ITM or OTM.
This maximum uncertainty translates into the highest probability component (time value and volatility value), which is the extrinsic value.
Glossar
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.
Maximum Uncertainty
Condition ⎊ Maximum uncertainty describes a market condition where there is a high degree of unpredictability regarding future price movements of an underlying asset.
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.
Maximum Extrinsic Value
Derivation ⎊ The maximum extrinsic value, within cryptocurrency derivatives and options trading, represents the peak premium an option commands beyond its intrinsic value, reflecting market sentiment and time decay.