At the money (ATM) is a term that describes a situation where the strike price of an asset is equal to or very close to its current market price.
It is also known as “on the money,” which is an attractive situation for traders who can profit from large market movements.
What happens when market price meets strike price?
When an asset’s strike price and current market price are the same, its intrinsic value becomes zero. Meaning there would be no gain or loss by buying or selling the asset.
While the intrinsic value is zero, the asset still has a time value. That’s why at the expiry time, the value of an asset can be either out of the money or in the money.
Example of at the money
To understand the “at the money” situation, here’s a small example.
Let’s assume the strike price and market price of a given commodity is $12. In this situation, the option is at the money.
Now, if the value of this commodity falls, it would create an out-of-the-money situation. However, if the price exceeds $12, it would be in the money situation.
Benefits of at the money options
Though the intrinsic value of an item becomes zero, there are a few benefits of trading the “at the money” situation.
- The risk of trading gets limited.
- High chances of making a huge profit.
The price of each commodity in binary options trading is either “at the money”, “in the money”, or “out of the money”. Thus, you must analyze the market and then opt for either the call option or put option.