The Impact of IMPLIED VOLATILITY (IV) on OPTIONS GREEKS: Summary

The Impact of Implied Volatility (IV) on DELTA
Assuming all other factors constant, when Implied Volatility increases, the time value portion of an option will increase.
As a result, the delta of OTM (Out-of-The-Money) options will go up, whereas the delta of ITM (In-The-Money) options will go down.
Nevertheless, the delta of ATM (At-The-Money) options will always remain at around 0.5.

Why is it so?
As discussed previously, IV has a very big impact on the option price. However, IV would affect only the time value component of an option's price, not on the Intrinsic Value.
Therefore, when there is significant movement in Implied Volatility, ATM and OTM options will be greatly affected as compared to ITM options.

However, although ATM will be significantly affected by IV movement, the delta of ATM options will always be around 0.5.

The Effect of Implied Volatility (IV) on THETA
When Implied Volatility (IV) decreases, Theta will be lower, especially when it is approaching expiration.
On the other hand, when IV increases, Theta would be higher.

Why is it so?
As discussed earlier in this post, Time Value as the price that people are willing to pay for the chance / uncertainty as to whether or not an option will finish ITM.
The more uncertain, the higher the time value will be.
An option that is far OTM has almost no chance of finishing ITM. As such, it will not command a high time value.
An option that is already deep ITM is almost certain that it will finish ITM, hence time value is smaller.
But ATM or near ATM options have more uncertainty as to whether or not the options will finish ITM, and therefore these options have a higher time value.

When IV decreases, such uncertainty will be lower, particularly when the option is nearing to expiration. This lower uncertainty will then be reflected in lower time value. Since Theta is the decrease of time value due to the passage of time, Theta will naturally be lower because it has less time value to lose over the remaining time to expiration.

For more detailed discussion, go to: Options Greek.

Related Topics:
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Understanding Candlestick Charts
* Learning Charts Patterns
* Trading Videos from Trading Experts You Should Not Miss