“At the money” (ATM) refers to a condition in options trading where the strike price of an option matches the current market price of the underlying asset. Options in this state often experience high trading volume due to their proximity to profitability.
Intrinsic Value and Trading Implications
ATM options have no intrinsic value and would result in a loss if exercised, considering the premium paid. However, this position signifies the threshold at which the option may start to accumulate intrinsic value.
Moneyness in Options Trading
In options trading, the term “moneyness” describes the relationship between the strike price of an option and the current market price of the underlying asset. There are three states of moneyness: out of the money, at the money, and in the money. An option is considered at the money when its strike price is equal to the market price of the underlying asset. It is out of the money if the market price has not reached the strike price, and in the money when the market price exceeds the strike price.
Example of “At the Money”
For example, consider a trader who buys a call option with a strike price of $12. The option is at the money when the current market price is also $12. If the market price rises above this level, the option becomes in the money, indicating it now holds value. Conversely, if the market price falls below $12, the option is out of the money and cannot be profitably exercised.
The same principles apply to put options. A put option with a $12 strike price is at the money when the market price is $12. It transitions to in the money if the underlying asset’s price falls below $12, making it valuable, while a rise in the market price above $12 places it out of the money.