What is At The Money (ATM)?

What is At The Money (ATM)?

At the money (ATM) is a situation where an option’s strike price is identical to the current market price of the underlying security. An ATM option has a delta of ±0.50, positive if it is a call, negative for a put.

Both call and put options can be simultaneously ATM. For example, if XYZ stock is trading at $75, then the XYZ 75 call option is ATM and so is the XYZ 75 put option. ATM options have no intrinsic value, but will still have extrinsic or time value prior to expiration, and may be contrasted with either in the money (ITM) or out of the money (OTM) options.

At the money (ATM) are calls and puts whose strike price is at or very near to the current market price of the underlying security.

ATM options are most sensitive to changes in various risk factors, including time decay and changes to implied volatility or interest rates.

ATM options are most attractive when a trader expects a large movement in a stock.

Value of At-The-Money Options

The total value of an option, which is also the option price, consists of two parts: an intrinsic value and a time value. The intrinsic value of an option, also known as the monetary value, is the difference between the strike price and underlying asset price, assuming the option is exercised immediately.

For example, the current (spot) price of an asset is $120, and the call option and put option share the same strike price at $100. The call option has a positive intrinsic value of $20, as it gives the right to purchase an asset that is worth $120 at the price of $100. The put option has no intrinsic value since it will not be exercised nor create any profits.

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The time value of an option is the value left after subtracting the intrinsic value from the total value. The further the expiration date, the higher the time value is. For a European option, when the intrinsic value of an option is greater than its total value, the time value is negative. For an American option, the trader can exercise the option whenever the time value is turning to be negative.

Time Value = Total Value – Intrinsic Value

An option has no intrinsic value when it is at the money. As the strike price of the option and the current market price of the underlying asset are the same, the option holder cannot make any profit by exercising the option, which means an at-the-money option only has a time value.

Options Pricing for At The Money (ATM) Options

An option’s price is made up of intrinsic and extrinsic value. Extrinsic value is sometimes called time value, but time is not the only factor to consider when trading options. Implied volatility also plays a significant role in options pricing.

Similar to OTM options, ATM options only have extrinsic value because they possess no intrinsic value. For example, assume an investor purchases an ATM call option with a strike price of $25 for a price of 50 cents. The extrinsic value is equivalent to 50 cents and is largely affected by the passage of time and changes in implied volatility.

Assuming volatility and the price stay steady, the closer the option gets to expiry the less extrinsic value it has. If the price of the underlying moves above the strike price to $27, the option now has $2 of intrinsic value, plus whatever extrinsic value remains.

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Example of at the money

Let’s say a trader decides to buy a call option with a strike price of $12. Once the current market price is also $12, then the option is at the money. If it rises beyond this point the option will be in the money, as it now has a value, but if it falls it will be out of the money and cannot be exercised.

If the trader decides to buy a put option with a strike price of $12 instead, it would still be considered at the money if the market price was $12. However, it would only be in the money if the underlying asset’s price fell beyond this point, but if the market rose it would be out of the money.

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