The term “At the Money” (ATM) is used in describing options where the strike price of the option is equal to the price of the underlying asset. It is a concept of moneyness where the difference between the current price of an asset is compared with the market price of the underlying. Two other concepts of moneyness are “In the Money” (ITM) and “Out of the Money” (OTM). In the money options have a positive intrinsic and time value, while out of the money options have no intrinsic value. ITM options are profitable if exercised, while OTM options have no value when exercised. It is possible for both call options and put options of the same underlying assets to be at the money at the same time. For example, a $50 call and a $50 put will both be at the money if the underlying asset has a market value of $50. Options are most frequently traded when they are at the money.
At-The-Money Options Value
When valuing options there are two factors considered – intrinsic value and time value. The intrinsic value of an option is the difference between the market price of the underlying asset and the strike price of the option. The time value of an option is what’s left when you subtract the intrinsic value from the total value. The further away the expiration date of an option, the higher time value is. With European options the time value is negative whenever the intrinsic value is higher than the total value. For American options the trader can exercise the option profitably whenever the time value turns negative.
Time Value = Total Value – Intrinsic Value
Options which are at the money have no intrinsic value. If the strike price and market price of the option are the same there is no profit in exercising the option, meaning an at the money option only has time value.
Moneyness of Options
Holders of call options can profit by exercising those options when the price of the underlying asset is greater than the strike price of the option. This means call options are in the money when the strike price is below the market price, and out of the money when the strike price is above the market price. On the other hand, holders of put options face an opposite situation. When the price of the underlying asset is below the strike price of the put option a profit can be made by exercising the option. These put options are in the money when the strike price is above the market price, but out of the money when the strike price is below the market price.
When you have a call option and a put option with the same strike price, they can both be at the money at the same time, however they cannot be either in the money or out of the money at the same time. As previously explained, a $50 call and a $50 put will both be at the money if the underlying asset has a market value of $50. Options are most frequently traded when they are at the money. In this case, if the price of the underlying increases, the call option is in the money with an intrinsic value equal to spot price minus strike price, while the put option is out of the money at the same time. If the price decreases, the call option is out of the money, and the put is in the money with an intrinsic value equal to strike price minus sport price.
At the Money Options in Practice
Note that options can be considered at the money when the market price and strike price aren’t exactly the same. This is because option pricing is discrete, and strike prices come in regular intervals. For example, strike prices for calls and puts are typically in $5 increments, so actual strike prices might be $40, $45, $50, etc. This makes it very rare for the market price to be exactly at the strike price, since market prices are changing second by second throughout the trading session. Because of this it is usual to consider an option to be at the money even if the current market price is close, but not exactly equal to the strike price of the option.
Consider options with a strike price of $50 with the underlying asset trading at $50.98. In this situation both the $50 call and the $50 put would be considered at the money, even though the strike price is slightly lower than the market price of the underlying. Technically the $50 call meets the definition of in the money, and the $50 put meets the definition of out of the money. However, in practice the market price and strike prices are so close that they are considered to be at the money.
At the Money (ATM) Option Features
At the money options are quite special and because they sit right at the border of ITM and OTM options they have some unique features.
Time Value and Time Decay
ATM options typically hold the highest time value, while also exhibiting a high rate of time decay. In the case of ITM and OTM options most of the time value of the option is lost long before the expiration of the option. But ATM options keep a good deal of time value until very close to their expiration. This is because it requires just a small move in the price of the underlying for the option to move into the money, thus gaining a substantial amount of intrinsic value. It is common for the time decay of an ATM option to accelerate dramatically near expiration.
Delta and Gamma
ATM options are quite sensitive to price movements in the underlying asset, but not as sensitive as ITM options. That’s how the “Greeks” are entering in the scene. This is measured by delta. While the delta of an ATM option is smaller than that of ITM and OTM options, it has the greatest slope (rate of change) as the expiration approaches.
This sensitivity of delta to price changes is measured by gamma, which is a very important risk measurement for options. Mathematically gamma is second to option premium with respect to the underlying price. In other words, it measures how rapidly losses can accelerate when the market moves against the option. Gamma is at its highest when an option is at the money.
Because of their unique features at the money options are typically the most actively traded of the options, with the greatest trading volumes and open interest, and the tightest bid-ask spreads.