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At The Money Option

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An at-the-money option is an option whose strike price is equal to the market price of its underlying security. For example, if a call option on stock XYZ, Inc. has a strike price of $50 and XYZ stock is currently trading for $50 per share, then this call is trading at-the-money. However, the buyer of an at-the-money option would not exercise the option as long as it remains an at-the-money option since it has no intrinsic value. Intrinsic value is only part of the option premium. Prior to the option's expiration date, an at-the-money option also has time value. The time value of an at-the-money option is influenced chiefly by the amount of time remaining until the expiration date. The other major factors affecting the premium of an at-the-money option are the volatility and dividends of its underlying security along with the current risk-free interest rate (e.g. the T-bill rate).



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