AT THE MONEY STOCK OPTIONS (ATM)- Options Trading Basics
At the money stock options are those options whose strike price is very close to the current market price of the underlying.
There are three types of moneyness notions related to Options that an options trader must be aware of. In-the-money (ITM), At-the-money (ATM) and Out-of-the-money (OTM). If you are new to Options Trading, you might be interested in first reading my post on Options Examples.
To understand the concept of At the Money stock options, one has to first understand the notion of intrinsic value of an Option. The Intrinsic Value of an Option, is the value which an options trader would get if she were to exercise the option at that moment. Thus for a Call Option whose strike price is greater than the value of the underlying intrinsic value is zero. Otherwise the intrinsic value of a Call Option is defined to be
For a Put Option whose strike price is lower than the current price of the underlying, the intrinsic value is zero. Otherwise Intrinsic Value of a Put Option is defined to be
The remaining component of the option price is called the Time Premium or Extrinsic value.
In the money options are those which have positive intrinsic value. Out of the money options have zero intrinsic value. While At the Money Options (ATM) have zero or nearly zero intrinsic value.
Options Greeks Stock Market Derivatives: Futures, Options Options Trading Basics In the Money Stock Options At the Money Stock Options Out of the Money Stock Options |
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