At-The-Money
At the money (ATM) is a term used in options trading to describe a situation where the strike price of the option is equal (or very close) to the current market price of the underlying asset.
This can apply to both call options and put options:
- A call option is at the money when the share price equals the strike price for buying.
- A put option is at the money when the share price equals the strike price for selling.
At-the-money options typically have the highest time value, as there's still a reasonable chance they could move into a profitable position before expiry. However, at that moment, the option has no intrinsic value - it wouldn’t result in a gain if exercised right away.
Why at-the-money matters to investors
Understanding when an option is at the money helps investors:
- Gauge the value and potential movement of an option
- Assess time value, which affects the option’s price
- Build or manage strategies, like spreads or hedging positions
At-the-money options are commonly used in options strategies, but are not suitable for all investors due to their risk and complexity.
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