ATM options are a type of option contract in which the strike price of the option is the same as the current market price of the underlying asset. “ATM” stands for “at-the-money,” which means that the option is currently trading at its intrinsic value. ATM options are popular among options traders because they offer the potential for high returns with a moderate level of risk. In this article, we will explore what ATM options are, how they work, and the advantages and disadvantages of trading ATM options.
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What are options?
Before we delve into ATM options, it is important to understand what options are. An option is a financial contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price (the strike price) on a specific date (the expiration date). The buyer of an option pays a premium to the seller of the option for the right to exercise the option.
There are two ways of trading options: calls and puts. A call option gives the buyer the right to buy the underlying asset, while a put option gives the buyer the right to sell the underlying asset. The seller of an option is obligated to sell or buy the underlying asset if the buyer chooses to exercise the option.
How do ATM options work?
ATM options are a type of option contract in which the strike price of the option is equal to the current market price of the underlying asset. When an option is an ATM, it means that the option has no intrinsic value, only time value. In other words, the option is only valuable if the price of the underlying asset moves above or below the strike price before the expiration date.
For example, let’s say that the current market price of a stock is Rs.100, and an investor buys an ATM call option with a strike price of Rs.100. If the stock price rises to Rs.110 before the expiration date, the investor can exercise the option and buy the stock at the strike price of Rs.100, then sell it in the market for Rs.110, making a profit of Rs.10 per share. However, if the stock price stays at Rs.100 or falls below Rs.100, the option expires worthless, and the investor loses the premium paid for the option.
Advantages of ATM options
Lower cost: ATM options are less expensive than options with a higher or lower strike price. This means that traders can buy more contracts for the same amount of money, potentially increasing their profits if the underlying asset moves in the desired direction.
High potential returns: Because ATM options have no intrinsic value, they offer the potential for high returns if the price of the underlying asset moves significantly before the expiration date.
Limited risk: When buying an ATM option, the most an investor can lose is the premium paid for the option. This means that the risk is limited to the amount of the premium, making it a more conservative investment strategy than buying the underlying asset itself.
Disadvantages of ATM options
Time decay: As with all options, ATM options lose value as the expiration date approaches. This means that traders must be able to accurately predict the timing of the price movements of the underlying asset in order to make a profit.
Limited profit potential: Because ATM options have no intrinsic value, their profit potential is limited to the amount of the price movement of the underlying asset. This means that traders must be able to accurately predict the direction and magnitude of the price movement in order to make a significant profit.
High volatility: Because ATM options are more sensitive to price movements of the underlying asset, they are more volatile than options with a higher or lower strike price. This means that traders must be able to handle higher levels of risk and volatility when trading ATM options.
ATM (At-The-Money) option trading is a popular strategy used by options traders in India. There are several mobile trading apps available that offer options trading features, but not all of them provide advanced options trading features like ATM option trading.
When it comes to options trading, it’s important to choose a platform that offers advanced features like ATM option trading, real-time data, and advanced charting tools. You should research and compare different platforms to find the one that best suits your trading needs and offers the features that are the best stock investment app for you.
