What is At The Money (ATM)?
At the money (ATM) is a situation where an option's strike price is identical to the price of the underlying security. 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 at the money and so is the XYZ 75 put option. An ATM option has no intrinsic value, but it may still have time value prior to expiration. Options trading activity tends to be high when options are ATM.
At The Money
Understanding At The Money
At the money is one of three terms used to describe the relationship between an option's strike price and the underlying security's price, also called the option's moneyness. Options can be in the money (ITM), out of the money (OTM), or at the money. ITM means the option has intrinsic value. OTM means the option has no intrinsic value. Simply put, at the money options are not in a position to profit if exercised, but they still have value in that there is still time before they expire so they may yet end up in the money.
The intrinsic value for a call option is calculated by subtracting the strike price from the underlying security's current price. The intrinsic value for a put option is calculated by subtracting the underlying asset's current price from its strike price. A call option is in the money when the option's strike price is less than the underlying security's current price. Conversely, a put option is in the money when the option's strike price is greater than the underlying security's stock price. A call option is out of the money when its strike price is greater than the current underlying security's price. A put option is out of the money when its strike price is less than the underlying asset's current price.
- At the money options have no intrinsic value, but they still have time value.
- At the money options usually cost more than out of the money options because they are closer to profiting in the time remaining until expiry.
- At the money options are most attractive when a trader expects a large movement in a stock.
At The Money and Near The Money
The term "near the money" is sometimes used to describe an option that is within 50 cents of being at the money. For example, assume an investor purchases a call option with a strike price of $50.50 and the underlying stock price is trading at $50. The call option is said to be near the money. The option would be near the money if the underlying stock price was trading between about $49.50 and $50.50, in this case. Near the money and at the money options are attractive when traders expect a big movement. Options that are even further out of the money may also see a jump when a swing is anticipated.
Options Pricing for At The Money 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, now the option has $2 of intrinsic value, plus whatever extrinsic value remains.
Investopedia university provides a more extensive explanation of on how options are priced.