At The Money

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker 2020!
    Good Choice for Beginners!
    Free Trading Education, Free Demo Account!
    Get a Sign-Up Bonus Now!

  • Binomo
    Binomo

    2nd in our ranking!

At The Money (ATM)

What is At The Money (ATM)?

At the money (ATM) is a situation where an option’s strike price is identical to the price of the underlying security. Both call and put options can be simultaneously ATM. For example, if XYZ stock is trading at $75, then the XYZ 75 call option is at the money and so is the XYZ 75 put option. An ATM option has no intrinsic value, but it may still have time value prior to expiration. Options trading activity tends to be high when options are ATM.

At The Money

Understanding At The Money

At the money is one of three terms used to describe the relationship between an option’s strike price and the underlying security’s price, also called the option’s moneyness. Options can be in the money (ITM), out of the money (OTM), or at the money. ITM means the option has intrinsic value. OTM means the option has no intrinsic value. Simply put, at the money options are not in a position to profit if exercised, but they still have value in that there is still time before they expire so they may yet end up in the money.

The intrinsic value for a call option is calculated by subtracting the strike price from the underlying security’s current price. The intrinsic value for a put option is calculated by subtracting the underlying asset’s current price from its strike price. A call option is in the money when the option’s strike price is less than the underlying security’s current price. Conversely, a put option is in the money when the option’s strike price is greater than the underlying security’s stock price. A call option is out of the money when its strike price is greater than the current underlying security’s price. A put option is out of the money when its strike price is less than the underlying asset’s current price.

Key Takeaways

  • At the money options have no intrinsic value, but they still have time value.
  • At the money options usually cost more than out of the money options because they are closer to profiting in the time remaining until expiry.
  • At the money options are most attractive when a trader expects a large movement in a stock.

At The Money and Near The Money

The term “near the money” is sometimes used to describe an option that is within 50 cents of being at the money. For example, assume an investor purchases a call option with a strike price of $50.50 and the underlying stock price is trading at $50. The call option is said to be near the money. The option would be near the money if the underlying stock price was trading between about $49.50 and $50.50, in this case. Near the money and at the money options are attractive when traders expect a big movement. Options that are even further out of the money may also see a jump when a swing is anticipated.

Options Pricing for At The Money Options

An option’s price is made up of intrinsic and extrinsic value. Extrinsic value is sometimes called time value, but time is not the only factor to consider when trading options. Implied volatility also plays a significant role in options pricing.

Similar to OTM options, ATM options only have extrinsic value because they possess no intrinsic value. For example, assume an investor purchases an ATM call option with a strike price of $25 for a price of 50 cents. The extrinsic value is equivalent to 50 cents and is largely affected by the passage of time and changes in implied volatility. Assuming volatility and the price stay steady, the closer the option gets to expiry the less extrinsic value it has. If the price of the underlying moves above the strike price, to $27, now the option has $2 of intrinsic value, plus whatever extrinsic value remains.

In the Money vs. Out of the Money: What’s the Difference?

In the Money vs. Out of the Money: An Overview

In options trading, the difference between “in the money” (ITM) and “out of the money” (OTM) is a matter of the strike price’s position relative to the market value of the underlying stock, called its moneyness.

An ITM option is one with a strike price that has already been surpassed by the current stock price. An OTM option is one that has a strike price that the underlying security has yet to reach, meaning the option has no intrinsic value.

In the Money

ITM options also have their uses. For example, a trader may want to hedge or partially hedge their position. They may also want to buy an option that has some intrinsic value, and not just time value. Because ITM options have intrinsic value and are priced higher than OTM options in the same chain, the price moves (%) are relatively smaller. That is not to say ITM option won’t have large price moves, they can and do, but, compared to OTM options, the percentage moves are smaller.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker 2020!
    Good Choice for Beginners!
    Free Trading Education, Free Demo Account!
    Get a Sign-Up Bonus Now!

  • Binomo
    Binomo

    2nd in our ranking!

Certain strategies call for ITM options, while others call for OTM options, and sometimes both. One is not better than another; it just comes down to what works for the best for the strategy in question.

A call option gives the option buyer the right to buy shares at the strike price if it is beneficial to do so. An in the money call option, therefore, is one that has a strike price lower than the current stock price. A call option with a strike price of $132.50, for example, would be considered ITM if the underlying stock is valued at $135 per share because the strike price has already been exceeded. A call option with a strike price above $135 would be considered OTM because the stock has not yet reached this level.

In the case of the stock trading at $135, and the option strike of $132.50, the option would have $2.50 worth of intrinsic value, but the option may cost $5 to buy. It costs $5 because there is $2.50 of intrinsic value and the rest of the option cost, called the premium, is composed of time value. You pay more for time value the further the option is from expiry because the underlying stock price will move before expiry, which provides an opportunity to the option buyer and risk to the option writer which they need to be compensated for.

Put options are purchased by traders who believe the stock price will go down. ITM put options, therefore, are those that have strike prices above the current stock price. A put option with a strike price of $75 is considered in the money if the underlying stock is valued at $72 because the stock price has already moved below the strike. That same put option would be out of the money if the underlying stock is trading at $80.

In the money options carry a higher premium than out of the money options, because of the time value issue discussed above.

Out of the Money

In the money or out of the money options both have their pros and cons. One is not better than the other. Rather, the various strike prices in an options chain accommodate all types of traders and option strategies.

When it comes to buying options that are ITM or OTM, the choice depends on your outlook for the underlying security, financial situation, and what you are trying to achieve.

OTM options are less expensive than ITM options, which in turn makes them more desirable to traders with little capital. Although, trading on a shoe-string budget is not advised. Some of the uses for OTM options include buying the options if you expect a big move in the stock. Since OTM options have a lower up-front cost (no intrinsic value) than ITM options, buying an OTM option is a reasonable choice. If a stock currently trades at $100, you can buy an OTM call option with a strike of $102.50 if they think the stock will reasonably rise well above $102.50.

OTM options often experience larger percent gains/losses than ITM options. Since the OTM options have a lower price, a small change in their price can translate into large percent returns and volatility. For example, it is not uncommon to see the price of an OTM call option bounce from $0.10 to $0.15 during a single trading day, which is equivalent to a 50 percent price change. The flip side is that these options can move against you very quickly as well, though the risk is limited to the amount paid for the option (assuming you are the option buyer and not the option writer).

At the money definition

What is at the money?

At the money (ATM) is a term used to describe an options contract with a strike price that is identical to the underlying market price. At the money options see a lot of trading activity, because they are so close to becoming profitable.

At the money options have no intrinsic value and will incur a loss if exercised due to the premium paid for the option. However, ATM is the point at which the option will start to have an intrinsic value.

In options trading, there are three ways to describe an option’s ‘moneyness’: out of the money, at the money and in the money. When the price of the underlying asset in an option is equal to its strike price, it is at the money. If it has not yet reached that point, it is out of the money, and if it has exceeded it then is in the money. These terms apply to both call options and put options.

Learn how to trade options

Discover everything you need to know to start trading options.

Example of at the money

Let’s say a trader decides to buy a call option with a strike price of $12. Once the current market price is also $12, then the option is at the money. If it rises beyond this point the option will be in the money, as it now has a value, but if it falls it will be out of the money and cannot be exercised.

If the trader decides to buy a put option with a strike price of $12 instead, it would still be considered at the money if the market price was $12. However, it would only be in the money if the underlying asset’s price fell beyond this point, but if the market rose it would be out of the money.

Build your trading knowledge

Discover how to trade with IG Academy, using our series of interactive courses, webinars and seminars.

Learn more

What is CFD trading?

Shares news

Contact us

Questions about opening an account:

Existing client questions:

We’re here 24hrs a day from 4am Saturday to 10pm Friday (BST).

Markets

Trading platforms

Learn to trade

About

Contact us

Follow us online:

The risks of loss from investing in CFDs can be substantial and the value of your investments may fluctuate. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how this product works, and whether you can afford to take the high risk of losing your money.

CFD Accounts provided by IG International Limited. IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority and is registered in Bermuda under No. 54814.

The information on this site is not directed at residents of the United States and is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

IG International Limited is part of the IG Group and its ultimate parent company is IG Group Holdings Plc. IG International Limited receives services from other members of the IG Group including IG Markets Limited.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker 2020!
    Good Choice for Beginners!
    Free Trading Education, Free Demo Account!
    Get a Sign-Up Bonus Now!

  • Binomo
    Binomo

    2nd in our ranking!

Like this post? Please share to your friends:
How To Start Binary Options Trading 2020
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: