If you want to trade options, you might come across the term "at the money". In this article, you will find out what it means, how it differs from other terms relating to being close to the money and for whom such options are worthwhile.
Definition of At the Money
Options are financial instruments that give the holders the right to acquire a to buy or sell the underlying asset at a specific point in time. This takes into account how the price has changed over a predetermined period. It is important to note that holders have the right, but not the obligation, to buy or sell the underlying asset at the exercise date.
At the Money is an option for which the exercise price, also known as the strike price, is Strike and the Current price of the underlying instrument match. If, on the other hand, there is a small deviation in price, the term "near the money" is used.
The so-called intrinsic value of an option is calculated as the difference between the current price of the underlying asset and the strike price. At the Money options have no intrinsic valueas the difference is zero, which is why it is not yet possible to buy or sell the option at a profit.
However, the price can change up to the expiry date and it is still possible to buy or sell the option. The term At the Money can for call and put options alike can be used.
Delimitations of proximity to money: At the Money, In the Money, Out of the Money
The term moneyness describes the proximity to money. Three different terms can be distinguished in relation to moneyness: At the Money, In the Money and Out of the Money.
- At the MoneyStrike of the option and the current price of the underlying asset match.
- In the MoneyCall option: In the case of a call option, the strike is below the current price of the underlying asset. With a put option, on the other hand, the strike is above the current price of the underlying asset.
- Out of the MoneyCall option: The strike of a call option is higher than the current price of the underlying asset. In the case of a put option, the strike is below the current price of the underlying asset.
Is an At the Money option worthwhile?
At the Money options can react sensitively to various factors. These include Changes in volatility or changes in the Time value expiry. These options are most attractive when a buyer expects a large movement in the underlying asset. Buyers have the advantage that no intrinsic value has to be paid for this type of option.
As the Trading volume of such options is usually the highest, they are the most liquid. This brings advantages for buyers and sellers, as the price spread between the bid and ask price is usually smaller.
For buyers of options, it generally makes no financial sense to exercise an option, as these none intrinsic value have.
- Long calls with a low time value are a possible exception
- If, for example, dividend distributions are outstanding that are higher than the fair value of the call option, it may be worthwhile exercising the option
The sellers of such options can be offered a attractive premium calculate. However, prices can always change.
Optionsgriechen from At the Money Options
Option Greeks are certain factors that play a role in the pricing of at-the-money options. They are important for option strategies.
Such at-the-money options are characterized by the largest Gamma which means that the delta can change quickly if the share price changes. Depending on the situation, this can lead to higher profits or losses.
On Theta the time value loss is measured. This is comparatively high for at-the-money options. The theta can be higher at maturity than with out-of-the-money options. Short-term strategies can be risky but attractive, as the time value loss usually falls more steeply at the end of a term.
The Vega values can be particularly strong with at-the-money options. Option prices can react very sensitively to changes in volatility. With out-of-the-money or in-the-money options, the vega value tends towards zero. Here it is unlikely that changes in volatility will lead to sharp changes in the price of the option.
Conclusion: Importance of At the Money options
There are different terms to describe how close options are to the money. At the money can describe options where the exercise price and the current price of the underlying match.
As the difference between the current price of the underlying asset and the strike price is zero for at-the-money options, these options have no intrinsic value. The usually High trading volumes of these options can bring advantages for buyers and sellers. In addition, sellers can expect attractive premiums, but must also bear in mind that the price can change at any time.
So-called option Greeks play a role in the selected options trading strategy. These are factors that are important for price formation. At-the-money options, for example, are characterized by a large Gamma and theta off.