At the Money Options
What is meant by at the money?
There are three words that are used to characterize the connection between the options strike price and the price of the underlying asset. One of these expressions is “at the money.” There are three possible outcomes for options: at the money, in the money, or out of the money. When referring to options, “at the money” refers to a situation in which the strike price of the option and the price of the underlying securities are equal. In a nutshell, an option is said to be “at the money” when the current price of the underlying stock is the same as the striking price.
Get complete FRM Online Course by experts Click Here
At the Money Call Options:
A call is nothing more than the agreement between the buyer and seller of a call option to trade a security at a certain price. The owner of a call option has the right but not the obligation to purchase a certain number of shares at a predetermined price.
When a trader anticipates that the price of the underlying asset will increase within a certain period of time, they will buy a call option. The holder of an at the money call option has the right but not the obligation to purchase the underlying asset at the price at which it is trading on the market at the time.
At the Money Put Options:
A derivative contract known as a put is one that involves two parties. The owner of a put option has the right but not the obligation to sell a certain number of shares at a predetermined price. When a trader anticipates that the price of the underlying asset will drop within a certain period of time, they will buy a put option. A put option that is “at the money” indicates that the holder of the option has the ability to sell the underlying asset at the price at which it is currently trading.
Example:
Let us consider that ITC ltd is trading at $50. Alex holds 3 calls and 3 put options on the stock. Their exercise prices are $49, $50 & $50.5 and they are due to expire the very next day.
Option with $50 is at the money because its stock price is equal to strike price.
Get complete CFA Online Course by experts Click Here
Conclusion:
Although an ATM does not have any inherent worth, it does have a temporal value until it is no longer usable. When an option is “at the money,” the level of trading activity is at its peak. When a trader anticipates significant price volatility in a stock, at-the-money options have a greater opportunity for profit.
Author: Urvi Surti
About the Author:
Urvi is a commerce graduate and has a keen interest in Finance. She has completed her Chartered Wealth Management (CWM) from the American Academy of Financial Management and is currently pursuing a career in Financial Risk Management (FRM).
Related Posts:
