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What is ATM (AT The Money) Options?

ATM are those options having Strike near to Spot Price. Current Price and Underlying is near. Example : NIfty is trading at 16970 Put Option : 17100                    ITM 17000                    ATM 16900                    OTM ATM Option has Delta Value 0.50 why ??? Because Probability of Nifty going up or down from Current Price is 1/2 i.e. 50% Call Option : 17100                     OTM 17000                     ATM 16900                     ITM  For Option video : https://youtu.be/XbwnxRLp7L8 Exercise : Reliance : CMP 2200 Rs PUT Option : 1800 2100 2200 2500 Call Option : 2000 2100 2200 2400 You can Comment here for more updates and Query on any option related Topics.

7 Factors That Determine An Option’s Price


 

1. Current Stock Price – Think,  If you interested in a call option that allows you to buy Reliance stock at 1150 per share, then you would naturally pay more for the call when the stock is trading near 1150 as opposed to it trading at 1200 right?
This is because the call option is now much closer to being ITM at 1150 than it was if it was trading at 1200. This works in the opposite for put options.
2. Strike Price – This is the price at which a call owner may purchase stock, and the put owner may sell stock. Like the example above, wouldn’t you pay more for the right to buy stock at say 1150 than for the right to buy stock at 1200?
Of course you would always prefer the right to buy stock at a lower price any day of the week! Thus, calls become more expensive as the strike price moves lower. Likewise, puts become more expensive in value as the strike price increases.
3. Type of Option – The value of an option depends on which type it is: Call or Put. Clearly there would be a difference depending on which side of the trade and market you are on. This probably is the easiest variable to understand.

4. Days Until Expiration – Options have a definitive life because of expiration. Therefore, an option will increase in value with more time. Why? Well, the more the time until expiration, the greater the probability or chance of a profitable move. For Nifty and Bank nifty have weekly Expiry while Stock have Monthly Expiry.

5. Interest Rates – This is really a small factor in determining an option’s price. When interest rates are on the rise, the value of call options rise as well. If a trader decides to buy a call option instead of stock, then the extra cash they have should theoretically earn interest for them. While this doesn’t necessarily work so easily in the “real world” the theory behind it does make sense.

6. Dividends – If a stock trades without giving the stockholder any dividend, it is said to be ex-dividend and its price goes down by the dividend amount. As dividend increases, puts are worth more while calls are worth less.

7. Volatility – The big variable right? In very simple terms, volatility measures the difference from day to day in a stock's price. I think of it as the “swings” that a stock has. Does it move back and forth violently or trading in a defined range with little daily movement? The stock like IBULL or DHFL have big volatility Compare to NTPC or GAIL.


Stocks that are volatile go through more frequent strike price levels than the non-volatile stocks. With these big moves, you have a higher chance of making money (i.e. moves outside the Blue area).
Thus an option on a volatile stock is much more expensive than one on a less volatile stock. Remember that even a small change in the volatility estimate can have a big impact on an options price.


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