How Does an ATM FX Option Work?
An ATM FX option is a forex option which is at-the-money. This essentially means that the strike price of a call or put option is the same as the spot price of the underlying currency.
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Definition of an Option
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The buyer of an FX option has the right, but not the obligation, to buy or sell the option at the agreed strike price (spot price of the underlying currency) on or before a specific date (expiration date) in the future. The option buyer pays the option seller a premium for this right.
At- the-Money Call Option
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The holder of a call option will be hoping that before or on the expiration date the market spot price of the underlying currency will be higher than the strike price (in the money) so that the option holder can exercise the option and receive currency cheaper than the market spot price and therefore sell into the market at a profit. If the market spot price is the same as the option strike price on or before the expiration date, the option is considered to be at-the-money and the option holder will let the option expire worthless. The option holder's only cost was then the initial premium.
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At-the-Money Put Option
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A put option is exactly the opposite of a call option. The option holder is hoping the underlying currency spot price is lower than the option strike price so he can sell the currency at the higher strike price and buy it back more cheaply in the market. If the put option is at-the-money (strike price the same as the market spot price) the option holder will let the option expire worthless and lose the premium that was paid.
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