Definition
In finance, “At The Money” (ATM) refers to a situation where an option’s strike price is identical to the current market price of the underlying security. Essentially, it means the option is neither in the money nor out of the money. This term is commonly used in both equity and futures options trading.
Key Takeaways
- At The Money is a term used in finance that refers to an options contract with a strike price that is identical to the market price of the underlying asset. This means that the option’s holder can purchase or sell the underlying asset at its current market price.
- This scenario generally reflects a neutral market condition – neither a bearish (declining) nor bullish (rising) trend. An At The Money option might be used when an investor is not certain about future price changes, essentially providing a balanced perspective on market movement.
- Options that are At The Money are often associated with greater volumes of trading due to their key role in strategies such as straddles or delta hedging, suggesting that they tend to have higher liquidity compared to In or Out of The Money options. Moreover, their value is entirely composed of time value since they hold no intrinsic value.
Importance
“At The Money” (ATM) is a crucial term in finance, referring to a situation in options trading where the option’s strike price is equal to the underlying asset’s market price.
Understanding this term is important as it provides key insight into an option’s intrinsic value and helps traders to predict potential profitability.
When an option is ATM, it typically leads to a delicate balance, since any slight shift in the security’s price can significantly affect the option’s value.
Moreover, options that are ATM often have the highest liquidity, which allows for smoother transactions, also playing a crucial role in managing potential risk and volatility in financial markets.
Explanation
“At The Money” is a finance term typically used in options trading where the strike price of an option is the same as the current market price of the underlying asset. This status is significant as it has a great influence on the option’s price and can impact whether or not an investor decides to carry out the transaction.
Being ‘At The Money’ means that this option presents the most cost-effective opportunity for the investor to take advantage of the market situation, assuming that the option is on or very near the day of expiration. The ‘At The Money’ options are a key tool used by investors to manage risks and take advantage of short-term fluctuations in the value of the underlying asset, thanks to their sensitivity to changes in the asset’s price.
These options provide an investor with some degree of protection against unfavorable price movements, as they can simply let the option expire worthless if the price moves in an adverse direction. On the other hand, if the underlying asset’s price moves favorably, the investor can exercise the option to earn a profit.
Therefore, ‘At The Money’ options offer a blend of potential profit and risk mitigation, which is a compelling reason they are an important element in strategic investment planning.
Examples of At The Money
“At The Money” (ATM) is a terminology used in options trading. It refers to a situation where an option’s strike price is identical to the price of the underlying security. Here are three real-world examples:Stock Options: Suppose an investor bought a call option for Apple Inc. shares with a strike price of $
If Apple’s shares are currently trading at $150, the option is considered ‘At The Money’. Neither the call holder nor the put holder make any profits at this level.Commodity Options: Consider an oil futures contract that has a strike price of $60 per barrel. If the current market price of oil is also $60 per barrel, then the options on this futures contract are considered to be ‘At The Money’. There are no intrinsic value yet, only time value for these options.
Currency Options: Let’s say a trader purchased an option on GBP/USD with a strike price of35, meaning they have the right to buy GBP/USD at this rate. If the current forex market rate for this pair is also
35, the option is considered to be ‘At The Money’. The trader would not gain or lose money if he/she exercises the option at this moment.
FAQs about At The Money
Q1: What does ‘At The Money’ mean?
‘At The Money’ is a term used in finance to indicate when an option’s strike price is the same as the market price of the underlying asset. This condition means that the option holder can purchase or sell the asset at its current market price.
Q2: What is the significance of an ‘At The Money’ option?
An ‘At The Money’ option holds the advantage of potentially being profitable with any change in the price of the underlying asset. It allows the trader a risk-neutral strategy as the market price and the strike price being the same offer an equal chance of the option being profitable or a loss.
Q3: How does ‘At The Money’ differ from ‘In The Money’ or ‘Out of The Money’?
In finance, ‘In The Money’ refers to an option that would be profitable if it were exercised immediately, while ‘Out of The Money’ means it would not. ‘At The Money’, on the other hand, is a neutral state where the option’s strike price and the current market price of the asset are the same.
Q4: Can an ‘At The Money’ option end in a profit?
Yes, an ‘At The Money’ option can end in a profit if the price of the underlying asset moves in a direction favorable to the option’s holder. However, if the price doesn’t move or moves unfavorably, the option would be worthless at expiration.
Q5: What factors affect the price of an ‘At The Money’ option?
Several factors affect the price of an ‘At The Money’ option, including the time to expiration, any dividends payable, the interest rate, and the volatility of the underlying asset.
Related Entrepreneurship Terms
- Strike Price
- Option Premium
- In The Money
- Out Of The Money
- Exercise Price
Sources for More Information
- Investopedia: A comprehensive online financial dictionary that contains over 20000 financial terms.
- CNBC: An American television business news channel owned by NBCUniversal News Group, providing live updates and analyses of financial markets.
- MarketWatch: A website that provides financial information, business news, analysis, and stock market data.
- Bloomberg: A global leader in business and financial data, news and insight.
