Concept of at-the-money
An option is at-the-money if its strike price equals the market price. This is a situation in which the exercise price of the option is identical to the price of the underlying asset on the spot (or spot market) market. Both call and put options are simultaneously at-the-money. For example, if the stock X ( an underlying asset of the option) is trading at € 10, then the call option on the X share is € 10, as well as the put option. When an option is at-the-money, it has no intrinsic value, but there may be a ‘time value’.
The value of an option consists of its intrinsic value and the time value.
The intrinsic value of an option refers to the immediate advantage that this agreement provides to the holder of the option. Thus, a call option has only an intrinsic value when its strike price is lower than the price of the underlying asset in the market (spot or spot price), and it is worthwhile for the holder to exercise its right to purchase the underlying asset. The intrinsic value of a call option contract can be calculated by subtracting the spot price of the underlying asset from the exercise price of the option.
The time value refers to the potential for valuing investors’ options and expectations.
Options trading tends to be high when the options are at-the-money.
