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+The Effects of Volatility and Time on
+Theta
+Stock price is not the only factor that affects theta values. Volatility and
+time to expiration come into play here as well. The volatility input to the
+pricing model has a direct relationship to option values. The higher the
+volatility, the higher the value of the option. Higher-valued options decay at
+a faster rate than lower-valued options—they have to; their time values will
+both be zero at expiration. All else held constant, the higher the volatility
+assumption, the higher the theta.
+The days to expiration have a direct relationship to option values as well.
+As the number of days to expiration decreases, the rate at which an option
+decays may change, depending on the relationship of the stock price to the
+strike price. ATM options tend to decay at a nonlinear rate—that is, they
+lose value faster as expiration approaches—whereas the time values of ITM
+and OTM options decay at a steadier rate.
+Consider a hypothetical stock trading at $70 a share. Exhibit 2.11 shows
+how the theoretical values of the 75-strike call and the 70-strike call decline
+with the passage of time, holding all other parameters constant.
+EXHIBIT 2.11 Rate of decay: ATM vs. OTM.