Definition:
At-the-money is a term used in finance to describe an option or derivative contract where the strike price (the price at which the underlying asset can be bought or sold) is equal to the current market price of the underlying asset.
For example, if a call option has a strike price of $50 and the underlying stock is currently trading at $50, the option is said to be at-the-money.
Key points about at-the-money options:
- No intrinsic value: At-the-money options have no intrinsic value, meaning they are not immediately profitable.
- Time value: The value of an at-the-money option is primarily derived from its time value, which is the potential for the underlying asset’s price to move in a favorable direction before the option expires.
- Volatility: The volatility of the underlying asset can have a significant impact on the value of at-the-money options. Higher volatility generally increases the value of at-the-money options.
- Delta: The delta of an at-the-money option is typically around 0.5, meaning that for every $1 increase in the underlying asset’s price, the option’s price is expected to increase by $0.50.
In summary, at-the-money options are those where the strike price equals the current market price of the underlying asset. Their value is primarily derived from their time value and the volatility of the underlying asset.
