What is an at the money stock option?
For example stock XYZ is trading at $45. We buy the the $45 call option which gives us the right to buy the stock at $45 sometime in the future. Because the strike price is the same as the stock price this is an ATM option. This option is a good compromise between the high risk high reward of an OTM option and the low risk low return of an ITM option. Say we are expecting Stock XYZ to go up. It is currently at $45. Let us examine 3 trades to see how these options differ. 1st ITM, you buy the $40 strike price for $6. 2nd ATM, you buy the $45 strike price for $2. 3rd OTM you buy the $50 strike pricke for $.50. If the stock goes up to $48 your options are worth. 1st ITM, at least $7 ($47-$40) or 16% return 2nd ATM, at least $3 ($47-$45) or 50% return 3rd OTM, $0 If the stock goes up to $53. 1st ITM, at least $13 or 116% 2nd ATM, at least $8 or 300% 3rd OTM, at least $3 or 550% If the stock goes down to $42. 1st ITM, at least $2 2nd ATM, $0 3rd OTM, $0 Many investor will use at the money stock option because the price of the stock does not have to move up a lot to make money like an OTM option and it will generally make more than a ITM option.
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