In my previous articles, I go over ITM and OTM strike prices and reveal my personal strategy for choosing a strike price- linked below. If you do not already understand ITM and OTM options, I recommend at least gazing over them so that the article you are reading now makes a little more since. This article will be a short read explaining what you can expect when choosing a strike price “at the money.”
ATM- At The Money
When we say an option is trading “at the money,” we are saying that the chosen strike price is equal to the current stock price. While the pros and cons of trading ITM and OTM options differ depending on whether or not you are buying or selling the contract, trading ATM is the same for both. In other words, this article will be a fairly short read. To explain what to expect when you trade at the money options, I will go over two important factors: POP (percent chance of profitability), and the option price.
1. POP- Percent chance of profitability
I like to think of choosing a strike price ATM as the equivalent of just buying a stock. If the stock price is currently at $50, and you buy it- you are buying the stock for $50 (duh). What are your chances of making money in this case? 50/50! The same goes with options. If you choose an ATM strike price for an option with a current stock price of $50, your strike price is also $50. Similarly to buying your stock, you will have about a 50% chance of making money.
2. Option Price
The price for trading ATM options can be looked at as a happy medium. You aren’t paying extra to have a higher percent chance of profitability, but at the same time you are not sacrificing a lower percent chance of profitability for a cheaper option.
Main Points
- ATM: The strike price = the current stock price
- You have a 50/50 chance of being on the winning side of the contract- making money
- You are not paying extra money to be in a better position, or less money to be in a worse position, you are right in the middle
So when would it benefit you to trade at the money options? I am going to answer this question with my personal interpretation of the information given to you in this article. For me personally, I choose at the money strike prices only when I have a strong directional assumption on something. FOR EXAMPLE- Assuming I were to sell a put, if I have a strong reason to believe that stock XYZ is going to jump 10% I may choose an ATM strike price. Why?
1. The price: If I choose an OTM strike, I am putting myself in a better position (higher percent chance of making money), but it will cost me a little more. I may not want the extra cost for safety if I have strong reason to believe that the stock price is going to rise.
2. The risk: Although I have high hopes that the stock price will shoot up, I would not want to chance an ITM strike price possibly ever for a position involving selling options. While ITM strike prices for short puts offer a better price, they come with a consequence- a lower percent chance of making money.
If I choose ATM, I am at a pretty good price, but I am not taking on as much risk as if I were to choose an ITM strike price… -a happy medium- Now that I have given you my personal interpretation, I hope you have a better understanding for how you would like to go about choosing a strike price.