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What does "at the Money" Mean?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 27 March 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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"At the money" is a financial term that is used to describe an event that takes place during the investment process. The event occurs when the strike price of a particular security option is identical to the market price of the security used to support or underlay that option. In determining if a given option is currently at the money, only the actual prices involved are considered; any type of transaction costs associated with the security are disregarded.

Identifying a security that is currently at the money can be helpful for the investor. This is because the nature of this event indicates that the security is likely to have what is known as a positive monetary value at the time that the investment matures. For example, if the security under consideration is a derivative, and achieves this status of being at the money, there is an increased chance that the investor will receive some return on that derivative at the point of maturity. The investor can assess the factors that led to this balance between the strike price and the market price, develop a projection of how long those factors will exert influence on the performance of the option, and then make an informed decision on whether to get involved with the option or look for opportunities elsewhere.

It is important to remember that while a security that is at the money does indicate chances for earning some sort of profit, achieving this status does not automatically mean that the option will actually generate a return. Shifts in the marketplace that have a negative impact on the underlying security could also have a negative impact on the market value of the option. Should this occur, then the option is no longer at the money and is deemed to be out of the money, meaning that the strike price and the market price are no longer in balance.

As with most calculations and assessment of investment options, knowing that a given option is at the money is very helpful in terms of considering whether to buy the option, hold onto it, or to sell it. This process typically involves projecting what is likely to happen between the present and the maturity date, allowing for various events that could reasonably occur in the marketplace during that time. From this perspective, identifying an at the money situation can be viewed as one more tool that investors use to make prudent investment decisions and increase the chances of earning returns rather than sustaining losses from their investment activities.

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