What is money (ATM)?
In money (ATM) is a situation where the strike price of an option is the same as the current market price of the underlying security. ATM options have a delta of ±0.50, positive for calls and negative for puts.
Both calls and puts can be ATMs at the same time. For example, if XYZ stock is trading at $75, then the XYZ 75 call is an ATM, as is the XYZ 75 put. ATM options have no intrinsic value, but still have extrinsic or time value until expiration, and may be contrasted with in-money (ITM) or out-of-money (OTM) options.
- The currency (ATM) is bullish and bearish with strike prices equal to or very close 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 in implied volatility or interest rates.
- ATM options are most attractive when traders expect large moves in stocks.
Understanding Money (ATM)
At the money (ATM), sometimes referred to as “on the money,” is one of three terms used to describe the relationship between the strike price of an option and the price of the underlying security, also known as the moneyness of the option.
Options can be in-the-money (ITM), out-of-the-money (OTM) or ATM. ITM means the option has intrinsic value, OTM means it doesn’t. In short, ATM options are not profitable if exercised, but still have value – there is still time before they expire, so they may end up as ITMs.
The intrinsic value of a call option is calculated by subtracting the strike price from the current price of the underlying security. On the other hand, the intrinsic value of a put option is calculated by subtracting the current price of the underlying asset from its strike price.
A call option is an ITM when the strike price of the option is lower than the current price of the underlying security. Conversely, a put option is an ITM when the strike price of the option is higher than the stock price of the underlying security. At the same time, when the strike price is higher than the current price of the underlying security, the call option is OTM, and when the strike price is lower than the current price of the underlying asset, the put option is OTM.
special attention items
Traders often use ATM options to build spreads and combinations. For example, a straddle usually involves buying (or selling) an ATM call and put option.
ATM options are the most sensitive to various risk factors and are known as the “Greeks” of options. ATM options have a delta of ±0.50, but have the largest gamma, which means that as the underlying asset moves, its delta will quickly move away from ±0.50, and move fastest as expiration approaches.
Options trading activity tends to be high when options are ATMs.
ATM options are most sensitive to time decay, represented by the option’s theta. Furthermore, their prices are most sensitive to changes in volatility, especially for further maturities, and are represented by the option’s vega. Finally, ATM options are also the most sensitive to changes in interest rates, as measured by rho.
near money (ATM) and money
The term “close to money” is sometimes used to describe options that are less than 50 cents from the ATM. For example, suppose an investor purchases a call option with a strike price of $50.50 and the underlying stock is priced at $50. In this case, a call option is called a near currency.
In the example above, if the underlying stock traded between $49.50 and $50.50, the option would be close to the currency. Options close to currencies and ATMs are attractive when traders expect big moves. Further OTM options may also jump when expectations fluctuate.
Option Pricing for At The Money (ATM) Options
The price of an option consists of intrinsic value and extrinsic value. Extrinsic value is sometimes referred to as time value, but time is not the only factor to consider when trading options. Implied volatility also plays an important role in option pricing.
Similar to OTM options, ATM options only have extrinsic value because they have no intrinsic value. For example, suppose an investor buys an ATM call option with a strike price of $25 at 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 prices remain stable, the closer an option gets to expiration, the lower its extrinsic value. If the price of the underlying is above the strike price to $27, the option now has an intrinsic value of $2, plus any remaining extrinsic value.