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kfp22
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Joined: October 8th, 2014, 1:34 pm

ATMF ?

February 19th, 2019, 11:30 am

Hello

I hear people speaking and trading options ATMF a lot. I am not in a trading position so wonder what do they mean. Precisely:

What is the significance of trading an option that is ATM forward? (Rather than ATM spot or any strike not even ATM?)

In what measure do people have in mind when they talk about the forward? (E.g. Under risk neutral measure I.e. K = spot * (rfr - 0.5*implied vol^2) ? )

Thanks
 
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DavidJN
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Joined: July 14th, 2002, 3:00 am

Re: ATMF ?

February 19th, 2019, 2:21 pm

Forgetting options for a moment, ATMF means that no money needs to change hands today when agreeing to a transaction settling at some date later than spot settlement. Don’t get too hung up on measure here, just think of what the price has to be for the transaction to be arbitrage-free. Review the 'cash and carry' no-arbitrage argument, you can find it in Wiki. 
 
Now think about options and time premium. What strike maximizes the time premium?
 
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Finatos
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Re: ATMF ?

March 3rd, 2019, 3:33 pm

It is pretty simple. Let's say there is no dividend. When you trade stock itself, even 3 months later you the stock ends with the same price as when you purchase, you are not breakeven, because you lose the time value of money. You could have earned some interest rate if you deposit the money in the bank rather than purchase the stock. Same concept is true for options. Say for call option, the real theoretical edge of being in the money is not when at maturity S>K but when S>K+financing cost which is the forward price. That is why people uses the ATMF.
 
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bearish
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Re: ATMF ?

March 3rd, 2019, 9:27 pm

This may sound a little convoluted, but if you take the Black-Scholes forward price of a European put or call (with the forward settle date equal to the option maturity date) and divide it by the forward price of the underlying, you end up with a quantity that only depends on [$] \sigma \sqrt{t} [$], if and only if the option is ATMF. 
 
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Alan
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Re: ATMF ?

March 6th, 2019, 5:25 pm

Well, it's also the unique strike where put=call.