at-the-money_atm [CapiPedia]

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====== At-The-Money (ATM) ======
At-The-Money (ATM) (also known as 'On-The-Money') describes a scenario in the world of [[options]] trading where an option's [[strike price]] is identical, or very close, to the current [[market price]] of its [[underlying asset]]. Think of it as a financial standoff. If a stock is trading at exactly $50 per share, a [[call option]] or a [[put option]] with a strike price of $50 is considered 'at-the-money'. At this specific point, the option has no [[intrinsic value]]—meaning there’s no immediate, built-in profit from exercising it. Its entire value comes from its potential to become profitable before it expires, a concept known as [[extrinsic value]] or time value. It's like standing at a crossroads: the stock could go up, making a call option profitable, or down, making a put option profitable. An ATM option is perfectly balanced on this knife's edge, waiting for a push in either direction.
===== The Three 'Moneyness' Musketeers =====
To fully grasp ATM, it's helpful to see it alongside its two companions: In-the-Money (ITM) and Out-of-the-Money (OTM). 'Moneyness' simply tells you whether an option would be profitable if you exercised it right now, ignoring the premium you paid for it.
  * Bold: At-The-Money (ATM): The strike price is the same as the stock price. It’s a tie. The option has zero intrinsic value.
  * Bold: [[In-The-Money (ITM)]]: The option is already profitable to exercise.
    - //For a Call Option//: The strike price is //below// the current stock price (e.g., you have the right to buy at $45 when the stock is $50).
    - //For a Put Option//: The strike price is //above// the current stock price (e.g., you have the right to sell at $55 when the stock is $50).
  * Bold: [[Out-of-the-Money (OTM)]]: The option is not profitable to exercise.
    - //For a Call Option//: The strike price is //above// the current stock price (e.g., you have the right to buy at $55 when the stock is $50).
    - //For a Put Option//: The strike price is //below// the current stock price (e.g., you have the right to sell at $45 when the stock is $50).
===== Why Should a Value Investor Care? =====
While a true [[value investing]] purist focuses on buying great businesses at fair prices for the long term, understanding options can be a surprisingly useful tool and a source of valuable information.
==== A Gauge of Market Nerves ====
ATM options are the most sensitive to changes in expected price swings, or [[volatility]]. The price of an ATM option (its premium) gives you a direct clue as to how much uncertainty the market is pricing into a stock's future. If the premium for an ATM option on a company you own suddenly skyrockets, it's a sign that traders are betting on a big move soon (perhaps around an earnings announcement). For a value investor, this can be a signal to double-check your thesis or simply be aware of the market's jittery sentiment.
==== A Tool for Income Generation ====
Some value investors use a strategy called a [[covered call]] to generate extra income from stocks they already own and plan to hold for a long time. This involves selling a call option on your stock. Selling an ATM covered call often provides the most attractive premium, offering a nice balance between generating income and the risk of having your shares sold (or 'called away') if the price rises above the strike price.
===== Key Characteristics of ATM Options =====
==== The Melting Ice Cube of Time ====
The value of an ATM option is 100% extrinsic value (time value). This value behaves like a melting ice cube: it shrinks every single day as the option gets closer to its expiration date. This phenomenon is called [[time decay]] (or its Greek name, [[theta]]). The rate of this decay is fastest for ATM options. This is a double-edged sword:
  * For the //buyer//, it's a constant headwind. You need the stock to move in your favor quickly enough to outrun the melting ice cube.
  * For the //seller//, this decay is your best friend. If the stock price stays put, you profit as the option's value evaporates over time.
==== A Practical Example: Fictional Motors Inc. ====
Let's put it all together.
  - Fictional Motors (ticker: FMI) is currently trading at $100 per share.
  - An ATM call option on FMI would have a strike price of $100.
  - An ATM put option on FMI would also have a strike price of $100.
If you buy the $100 call option, you are betting that FMI will rise significantly above $100 before the option expires. If you buy the $100 put option, you are betting it will fall significantly below $100. Right now, at $100, both options are on the fence, with their entire value derived from the //possibility// of a future price move and the time left for that move to happen.