Options trading tactics vary. At-the-money picks are popular. This article explains beginners at-the-money choices.
Know Your Options
Options give the right but not the duty to buy or sell an asset at a strike price before expiration. At-the-money options strike at the asset’s current price.
Basics of At-Price Options
At-the-money? Showing an example. Consider XYZ stock options. A straight shot The $50 strike XYZ call option pays $50.
Executing your option costs $50 for XYZ shares. The strike price matches the market price, putting this option at-the-money. The strike price for XYZ at-the-money put options is $50.
Key At-The-Money Options Factors
At-the-money option traders should know these variables:
1. Asset volatility strongly affects at-the-money options. Options rise with volatility and decline with low volatility.
2. Time Left: Option expiration dates impact value. All else equal, option values fall toward expiration.
3. Interest rates affect at-the-money options. decrease interest rates decrease option prices, whereas higher rates increase them.
Trading Strategies
Several trading techniques use at-the-money options. Common methods:
1. Long Straddle: Investors purchase call and put options with the same strike and expiration. This is employed by investors who predict a major price movement but are unsure of its direction.
2) Covered Call: Sell long asset call options. Popular for stock gains.
3. Collar Strategy: Buys and sells out-of-the-money put/call options. Most trading profits and losses are small.
Conclusion
At-the-money options are cheaper, therefore traders like them. They provide traders tactical flexibility and asset price gains without upfront costs.
To trade options successfully, know their risks. Starters should learn at-the-money strategies first.
Sources and References:
“What is At-The-Money (ATM) Option,” Investopedia, www.investopedia.com
“Options Trading Strategies,” The Options Industry Council, www.optionseducation.org
“Options Pricing,” Charles Schwab, www.schwab.com