What Is an At the Money Option?
Unpack "at the money" options. Grasp this core concept in options trading, its unique position, and what influences its market price.
Understanding specific terminology is important when navigating financial options. “At the money” (ATM) describes a relationship between an option’s strike price and the underlying asset’s current market price. This concept helps classify options based on their potential for immediate profitability and is foundational for understanding option valuation and trading strategies.
Understanding At The Money
An option is “at the money” when its strike price is identical to the underlying asset’s current market price. The strike price is the predetermined price at which the option holder can buy or sell the underlying asset.
For a call option, which grants the right to buy an asset, it is at the money if the strike price equals the current market price. For example, if a stock trades at $50, a call option with a $50 strike price is at the money. For a put option, which grants the right to sell an asset, it is at the money if its strike price matches the underlying asset’s current market price. If the same stock is at $50, a put option with a $50 strike price is also at the money.
At-the-money options have no intrinsic value because exercising them immediately would not result in a profit. For instance, buying a $50 call option when the stock is at $50 means buying the stock at its current market price, yielding no immediate gain. Both a call and a put option on the same underlying asset can be at the money simultaneously if their shared strike price matches the current asset price.
Comparing At The Money With Other Option States
Options are categorized by their “moneyness,” which describes the relationship between the strike price and the underlying asset’s market price. Besides “at the money,” the other two states are “in the money” (ITM) and “out of the money” (OTM). These classifications determine whether an option has intrinsic value.
An option is “in the money” if it possesses intrinsic value, meaning it would be profitable to exercise immediately. For a call option, it is in the money when the underlying asset’s market price is higher than the option’s strike price. For instance, if a stock trades at $55 and you hold a call option with a $50 strike price, you could buy the stock for $50 and immediately sell it for $55, realizing a $5 profit per share. Conversely, a put option is in the money when the underlying asset’s market price is lower than the option’s strike price. If the stock is at $45 and you have a $50 put option, you could sell the stock for $50, which is more than its current market value of $45.
An option is “out of the money” if it has no intrinsic value and would not be profitable to exercise immediately. For a call option, this occurs when the underlying asset’s market price is lower than the strike price. If a stock is at $45 and your call option has a $50 strike, buying at $50 would be more expensive than its market value. For a put option, it is out of the money when the underlying asset’s market price is higher than the strike price. If the stock is at $55 and your put option has a $50 strike, selling at $50 would be less than its market value. At-the-money options sit precisely at the threshold where an option transitions between being in the money and out of the money.
Factors Influencing At The Money Option Value
The price of an at-the-money option, known as its premium, is driven by factors other than intrinsic value, as ATM options have none. The premium of an ATM option is composed entirely of “time value” or “extrinsic value.” This component reflects the market’s expectation that the underlying asset’s price could move favorably before the option expires, allowing it to become in the money.
Time value diminishes as an option approaches its expiration date, a phenomenon known as time decay. ATM options exhibit the highest amount of time value compared to in-the-money or out-of-the-money options with the same expiration. This is because they have the greatest potential to move into a profitable state. The longer the time remaining until expiration, the greater the time value, as there is more opportunity for the underlying asset’s price to fluctuate.
Implied volatility also influences the value of an at-the-money option. Implied volatility represents the market’s forecast of how much the underlying asset’s price is expected to fluctuate. Higher implied volatility leads to a higher time value and thus a higher premium for ATM options, reflecting an increased likelihood that the option will move into the money before it expires. Conversely, lower implied volatility results in a lower premium for ATM options.