What is At The Money (ATM)?
At The Money (ATM) denotes a situation where an option’s strike price matches the current market price of the underlying security. An ATM option has a delta of ±0.50; positive for calls, negative for puts.
Both call and put options can be simultaneously ATM. For example, if XYZ stock is trading at $75, both XYZ 75 call and put options are ATM. Such options possess no intrinsic value but retain extrinsic or time value until expiration, contrasting with in the money (ITM) or out of the money (OTM) options.
Key Takeaways
- ATM options’ strike price is at or close to the underlying security’s market price.
- They are highly sensitive to time decay and changes in implied volatility or interest rates.
- ATM options are ideal when anticipating significant stock movements.
Understanding At The Money (ATM)
At The Money (ATM), also called “on the money,” is a term describing an option’s moneyness relative to its underlying security’s price. Options can be In The Money (ITM), Out Of The Money (OTM), or ATM. While ITM options have intrinsic value, OTM options don’t. ATM options are not immediately profitable if exercised but have the potential if the market moves favorably before expiration.
Intrinsic Values:
- For call options: Intrinsic value = underlying security’s current price - strike price
- For put options: Intrinsic value = strike price - underlying security’s current price
In The Money (ITM):
- Call options are ITM when the strike price < current price of the underlying security.
- Put options are ITM when the strike price > the current price of the underlying security.
Out of The Money (OTM):
- Calls are OTM when the strike price > current price of the underlying security.
- Puts are OTM when the strike price < current price of the underlying security.
Special Considerations
Traders often use ATM options for constructing spreads and combinations, such as Straddles, which involve purchasing both an ATM call and put.
ATM options are highly sensitive to risk factors known as the
Related Terms: strike price, underlying security, call option, put option, moneyness, intrinsic value, extrinsic value, delta, theta, vega, gamma, rho, straddle, near the money, implied volatility.
References
Get ready to put your knowledge to the test with this intriguing quiz!
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## What does the term "at the money" (ATM) refer to in options trading?
- [x] When the option's strike price is equal to the market price of the underlying asset
- [ ] When the option's strike price is well below the market price of the underlying asset
- [ ] When the option's strike price is well above the market price of the underlying asset
- [ ] When the option's strike price is irrelevant to the market price of the underlying asset
## In which type of options transactions is "at the money" most often used?
- [x] Both call and put options
- [ ] Only call options
- [ ] Only put options
- [ ] Only in-the-money options
## What happens to the intrinsic value of an "at the money" option?
- [ ] It increases significantly
- [ ] It decreases significantly
- [x] It is zero
- [ ] It becomes negative
## How does "at the money" affect the extrinsic value of an option?
- [ ] It has the lowest extrinsic value
- [x] It tends to have a higher extrinsic value
- [ ] It has no impact on extrinsic value
- [ ] It eliminates its extrinsic value
## What is the potential profit for an at the money option at expiration?
- [ ] The profit is typically very high
- [x] The profit is typically zero
- [ ] The profit is always negative
- [ ] The profit is unpredictable
## Which of the following statements is true about "at the money" options?
- [x] They are neither profitable nor loss-making purely based on the strike price and current market price
- [ ] They are the most certain way to guarantee a profit from options trading
- [ ] They are usually the most expensive options to purchase
- [ ] They cannot be sold once purchased
## In an "at the money" scenario, which two values are usually equal?
- [ ] The risk and reward
- [ ] The trading fees and premium
- [x] The strike price and the current market price of the underlying asset
- [ ] The market demand and supply
## Why might an investor consider buying an "at the money" option?
- [x] To benefit from potential rapid movements of the underlying asset's price
- [ ] To minimize risk and guarantee returns
- [ ] To ensure the option remains worthless
- [ ] None of the above
## How does volatility affect "at the money" options?
- [ ] Volatility has no effect on ATM options
- [x] Higher volatility increases the premium of ATM options
- [ ] Lower volatility does not affect the premium of ATM options
- [ ] Volatility decreases the likelihood of exercising ATM options
## Which of the following is a characteristic of "at the money" options at expiration?
- [ ] They are always exercised
- [ ] They get automatically sold
- [ ] They are always worth a significant sum
- [x] Their intrinsic value is zero if the market price equals the strike price
