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At-the-Money (ATM Options)

Moneyzine Editor
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Moneyzine Editor
1 mins
January 8th, 2024
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At-the-Money (ATM Options)

Definition

The term at-the-money refers to an option that has a strike price which is identical to the current market price of the underlying security. The concept of moneyness helps an investor to understand the position of an underlying asset relative to an option's strike price.

Explanation

When an investor holds an option, they are provided with the right, but not an obligation, to buy or sell the underlying asset at the strike price on or before the contract's expiration date. In the case of a call option, the holder has the right to buy the underlying asset, while a put option confers the right to sell the underlying. An at-the-money option has no intrinsic value since the current market price and the strike price indicated on the option are the same.

An option that is at-the-money (ATM) will usually trade at a premium that accounts only for the time value of the option itself, since it can increase in value over time. In this example, the premium paid for the option would be a function of the time to expiration and the security's volatility. Everything else being equal, the longer the time to expiration and the greater the volatility of the underlying asset, the greater the chance the option will be in-the-money and the higher the premium paid for the option.

While it's important to understand the concept, options would rarely be at-the-money. An option whose strike price is close to the current market price would more likely be labeled as "near-the-money."

Related Terms

  • Deep in-the-Money (Options)
    The term deep in-the-money refers to an option that has significant intrinsic value. The concept of moneyness helps an investor to understand the position of an underlying asset relative to an option's strike price.
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  • In-the-Money (ITM Options)
    The term in-the-money refers to an option that has positive intrinsic value. The concept of moneyness helps an investor to understand the position of an underlying asset relative to an option's strike price.
    Moneyzine Editor
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  • Implied Volatility (IV)
    The term implied volatility refers to a measure that allows an investor to understand how much the market believes the price of a stock will move over time. Implied volatility is an important concept for investors in options to understand.
    Moneyzine Editor
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  • Historical Volatility (Statistical Volatility)
    The term historical volatility refers to a measure that allows an investor to understand how much the price of a stock moved over time. As is the case with implied volatility, historical volatility is an important concept for option investors to understand.
    Moneyzine Editor
    Moneyzine Editor
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