At the Money Options Explained

At the money options strike prices (ATM) are strikes that follow the closest to the current price of the stock. When looking at an options chain, look for the strike price that’s closest to the price of the stock and that would be the ATM strike. Options strikes make up one of the most critical components of options contracts. There are in the money, out of the money and at the money strikes to choose from. At the money contracts are very popular with trading weekly contracts as well as day trading options. Watch our video on how at the money strike prices work when trading options.

What Does At the Money (ATM) AKA Near the Money Mean?

At the money is a term used in options trading. ATM is a situation where the strike price of an options contract is the same as the stock price it’s currently trading at. ATM is one of the three “money” components to options trading.

The video above explains how it works when purchasing an options contract. 

There are many moving parts to trading options. Hence the need to know how stock options work. Options give you the right but not the obligation to buy or sell a stock at a specified price.

One options contract controls 100 shares. Hence, making options trading less expensive. For example, you wanted to trade a stock that is trading at $50. If you were to buy 100 shares at $34.00 you’d be spending $3,400. Let’s say an at the money options contract costs $1.15. That trade would only cost you $115.

As you can see, you’d be spending a lot less money to place that trade. However, this much more that goes into options that affect profit and loss. You have to figure out your trading style and whether you like stocks vs options better.

Basics of At the Money

at the money

Since at the money options have the same strike price as the current market price, they have no intrinsic value. You get intrinsic value by subtracting a stock’s price and strike price. As a result, being the same, there is no intrinsic value.

That means it’s up to the extrinsic value also known as time value. Both intrinsic and extrinsic value make up the strike price. If there’s no intrinsic value than time becomes really important.

Options contracts have expiration dates. As a result, if you’re trading at the money options contracts you would need to make sure you’ve given yourself a few months to expiration.

The reason for that is you can make money off of time. You can also lose money off of time. There are two other types of options moneyness. They are in the money and out of the money. This is why selling options is key.

They’re both different based of whether you’re buying calls or puts. An in the money call options is when the strike price is less than the market price. Whereas a put in the money contract has a strike that is above the current market price.

Out of the money calls have a strike that’s higher than the market price. The put side has a strike less than current market value. However, at the money has no difference in strike and market value for either play.

Looking to learn more about candlesticks patterns and candlestick reversals? Make sure to take our free candlesticks courses in our courses section.

Implied Volatility

Implied volatility plays a significant role in options trading. As stated earlier, intrinsic and extrinsic value form the strike price. However, implied volatility is another contributing factor. Read our implied volatility formula post.

Without intrinsic value, the strike price is affected by time and volatility. If time passes and price stays pretty much the same, you’re losing time value. Hence your profit potential is most likely hurting as well.

Volatility moves price as well as profit or loss. Implied volatility means you’re getting a look at where the market thinks a stock is heading. That can be an incredibly important factor in your trading decision (check out our swing trading strategies page).

However, nothing is 100% perfect. Just because the market believes a stock’s implied volatility is going to be bullish doesn’t mean that’s what’s going to happen. There’s no magic formula to finding out where a stock’s price is going to go.

Patterns: At the Money

at the money

Just like in stock trading, choosing the correct direction is just as important when using options trading strategies. One could argue it’s even more important because of the other factors that affect profit. You can get larger profit returns with options trading in a much quicker time frame.

However, chose the wrong direction and you lose the entire premium you paid for the trade. The goal is usually to have your options contract be in the money when you sell. However, you may have a different strategy where that isn’t the case.

Patterns are important no matter what trading style and strategy you employ. Patterns can signal a reversal or continuation as well as give support and resistance. Any trader worth his salt knows how important candlesticks, patterns along with support and resistance are.

Playing a bullish trade on a bearish breakdown usually results in a loss. You may have the ability to hold the stock until it recovers. However, if you’re trading options you’d better hope it’s before your expiration date.

If you’re investing long term, you may prefer a point and figure chart instead of a candlestick charts. It doesn’t matter. Even point and figure charts are all about support and resistance along with trends. Take our options trading course.

The Bottom Line

At the money options contracts have a strike price that’s the same as the current market price. Since options trading has many moving parts that affect profits make sure you spend the time to study as well as practice trading contracts. 

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