What Is At the Money (ATM)?
Let me explain what at the money (ATM) means in options trading. It happens when an option's strike price is identical to the current market price of the underlying security. This setup gives you detailed strategic insights for your trading decisions, especially around market movements. As a trader, you'll find ATM options have a delta of about ±0.50, and I often use them to build various strategies.
How ATM Options Work
You should know that ATM, sometimes called 'on the money,' is one of three ways to describe an option's moneyness—the relationship between its strike price and the underlying security's price. Options can be in the money (ITM), out of the money (OTM), or ATM. ITM options have intrinsic value, OTM don't, and ATM options aren't profitable if exercised right now but still hold value because there's time left before expiration—they might become ITM.
For a call option, intrinsic value is the underlying's current price minus the strike price. For a put, it's the strike minus the underlying's price. A call is ITM if its strike is below the current price, and a put is ITM if its strike is above. OTM is the opposite. That's the basics you need to grasp.
Important Factors for Trading ATM Options
When trading, I find ATM options useful for building spreads and combinations. Take a straddle, for instance: you buy or sell both an ATM call and put. These options are the most sensitive to the Greeks, which measure risk factors. They have a ±0.50 delta and high gamma, so the delta changes fast as the underlying moves, especially near expiration.
Trading picks up when options are ATM. They're also highly sensitive to time decay (theta), volatility changes (vega, especially for longer maturities), and interest rates (rho). Keep these in mind for your trades.
Differentiating ATM and Near the Money Options
Near the money means an option is within 50 cents of being ATM. Say you buy a call with a $50.50 strike and the stock is at $50— that's near the money. It applies if the stock is between $49.50 and $50.50 in this case. You might prefer near the money or ATM options if you're expecting big market swings, and even further OTM options could benefit from anticipated volatility.
Pricing Considerations for ATM Options
An option's price includes intrinsic and extrinsic value. Extrinsic value, or time value, isn't just about time—implied volatility matters too in pricing. Like OTM options, ATM ones have only extrinsic value, no intrinsic. For example, if you buy an ATM call at $25 strike for 50 cents, that 50 cents is all extrinsic, influenced by time passing and volatility shifts.
If volatility and price hold steady, the extrinsic value drops as expiration nears. But if the underlying rises to $27, you get $2 intrinsic value plus any remaining extrinsic.
The Bottom Line
In options trading, ATM options—where strike matches the underlying's market price—are crucial. With a ±0.50 delta, they're sensitive to time decay, volatility, and rates. They lack intrinsic value but have extrinsic, making them ideal for strategies like straddles if you expect big moves. You need to understand gamma, theta, and vega to use them effectively in spreads.
Key Takeaways
- ATM options have strike prices equal to the current market price of the underlying security.
- They possess no intrinsic value but have extrinsic value that can fluctuate with time decay and volatility.
- Traders use ATM options for spreads and combinations due to their high sensitivity to market changes.
- The Greeks, especially delta and gamma, are significant for measuring ATM options' risk sensitivity.
- Near the money options are within 50 cents of ATM and are useful when large market movements are anticipated.
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