At-the-money

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Overall, the lEE performs accurately for in-the-money and at-the-money options (see figure (4.3)). The relative and absolute deviation from the cdf is only about Arei K) th Aabs K) w 10 — 10 . We obtain less accurate figures only for far-out-of-the money options with an absolute approximation error of about Aabs K) w 10" - 10" , together with a relative error of A,/(/T) 10-4-10"2. 

First, the option price increases with the correlation for in-the-money and at-the-money options (moneyness < 1-075). By contrast, we observe a decrease in the price coming along with a higher correlation for out-of-the-money options (figure (6.3)). 

The convertible bond will be more sensitive with the change of volatility when the option is at the money, or the share price is closed to the conversion price. 

Moneyness—Is the option worth exercising If so, it is said to be in-the-money (ITM). Our call option struck at 98 would be in-the-money if the underlying bond was trading above 98. If the bond were trading below 98, the call would instead be out-of-the-money (OTM). Finally, if the current price of the underlying asset was the same as the strike price, 98 in this example, the option would be at-the-money (ATM). Premium—The amount paid by the buyer of an option is called the premium. This is normally paid up-front. 

The time value of at-the-money options is the greatest. This is not so apparent from Exhibit 17.8 which shows the total premiums, comprising intrinsic value and time value. Exhibit 17.9 shows the time value component by itself, which makes this feature obvious. With OTM options, the entire premium is time value—this applies to the 117-strike calls and the 116-strike puts, for example. With ITM options, the time value is the total premium less the intrinsic value. For example, the intrinsic value for the April 2003 call option struck at 115 is 1.42 (116.42 less 115). Subtracting this from the total premium of 1.53 gives the time value of 0.11 shown in the table. 

In that case, the investors borrow at the money market rate. They... 

An option that has intrinsic value is in the money. One with no intrinsic value is out of the money. An option whose strike price is equal to the underlying s current price is at the money. This term is normally used only when the option is first traded. 

At-the-money An option for which the strike price is identical to the underlying asset price... 

The market uses implied volatilities to gauge the volatility of individual assets relative to the market. The price volatility of an asset is not constant. It fluctuates with the overall volatility of the market, and for reasons specific to the asset itself When deriving implied volatility from exchange-traded options, market makers compute more than one value, because different options on the same asset will imply different volatilities depending on how close to at the money the option is. The price of an at-the-money option is more sensitive to volatility than that of a deeply in- or out-of-the-money one. 

At-the-money options have the greatest time value in-the-money contracts have more time value than out-of-the-money ones. These relationships reflect the risk the different options pose to the market makers that write them. Out-of-the-money call options, for instance, have the lowest... 

At-the-money options—which constitute the majority of OTC contracts—are the riskiest to write. They have 50—50 chances of being exercised, so deciding whether or not to hedge them is less straightforward than with other options. It is this uncertainty about hedging that makes them so risky. Accordingly, at-the-money options have the highest time values. 

An option s value, or price, is composed of two elements its intrinsic value and its time value. The intrinsic value is what the holder would realize if the option were exercised immediately—that is, the difference between the strike price and the current price of the underlying asset. To illustrate, if a call option on a bond has a strike price of 100 and the underlying bond is currently trading at 103, the option has an intrinsic value of 3. The holder of an option will exercise it only if it has intrinsic value. The intrinsic value is never less than zero. An option with intrinsic value greater than zero is in the money. An option whose strike price is equal to the price of the underlying is at the money one whose strike price is above (in the case of a call) or below (in the case of a put) the underlying s price is out of the money. 

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