At the Money Forward Option - Explained
What is an At-the-Money Forward Option?
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Table of ContentsWhat is an At-the-Money Forward Option?How Does an At-the-Money Forward Option Work?Academic Research on At The Money Forward Options
What is an At-the-Money Forward Option?
An option is At the money (ATM) when the options strike price is exactly the same as the price of the underlying security. Both call and put options can be at the money. If an option is at the money, that means it doesn/t have any intrinsic value, it only has time value. For example, stock X is at the money, the current share price and the strike price of stock X is $100. The seller wont make any profit by exercising the option, however, an upward move in stock price will give the option value. When options are at the money, the trading activity tends to rise.
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How Does an At-the-Money Forward Option Work?
The relationship between the strike price of an option and the underlying securitys price can be of three types at the money (ATM), in the money (ITM), and out of the money (OTM). This relationship is also called moneyness. Options having intrinsic value is in the money and options without any intrinsic value is out of the money. At the money options do not have intrinsic value at the moment, profits wont be earned if exercised, but still, it has time value that means there is still time before they expire. So, in the future, there are chances to earn a profit from this option. The intrinsic value of a call option is the underlying securitys current price minus the strike price. The intrinsic value of a put option is its strike price minus the underlying assets current price. So, if the underlying securitys current price is greater than the options strike price, then the call option is in the money. On the other hand, when the underlying securitys stock price is less than the options strike price for a put option, it is in the money. When a call options current underlying securitys price is less than its strike price, it is out of the money. If a put options strike price is less than the underlying assets current price, then the option is out of the money. If an option is within 50 cents of being at the money, it is called near the money. For example, a call option is purchased with a strike price of $80.50 and the trading price of the underlying stock is $80. This call option is near the money. If there is an anticipation of a big movement, the at the money and near the money options are attractive options. The intrinsic and extrinsic value of an option together creates the price of the option. The extrinsic value can also be referred to as the time value. Time and implied volatility are important factors that determine the price of an option. Both the out of the money options and at the money options have extrinsic value but do not have any intrinsic value. Lets assume an at the money call option having a strike price of $30 is purchased for a price of $1. The extrinsic value of the options is equivalent to $1. Time and the changes in implied volatility have their impact on this value. If the volatility and the price remain steady, the extrinsic value will decrease gradually towards the date of expiry. If the price of underlying becomes greater than $30, say $34 then the intrinsic value of the option is $4. The price will be calculated as $4 plus the extrinsic value that is retained.