What Is At-the-Money (ATM) in the Stock Market?

At-the-money (ATM) is a fundamental concept in the stock market, particularly within options trading. It describes a specific relationship between an option’s strike price and the current market price of its underlying asset. Understanding ATM is important for comprehending how options are valued and how they behave in response to market movements.

Understanding At-the-Money (ATM)

An option is considered “at-the-money” (ATM) when its strike price is identical or very close to the current market price of the underlying asset. The underlying asset is the financial instrument, such as a stock, that the option contract gives the holder the right to buy or sell. The strike price, also known as the exercise price, is the predetermined price at which the underlying asset can be bought or sold if the option is exercised. For practical purposes, an option is often considered ATM if its strike price is the nearest available strike to the current market price of the underlying asset.

For example, if a stock is trading at $50 per share, a call option or a put option with a strike price of $50 would be considered at-the-money. Options contracts are standardized, with one equity option contract typically representing 100 shares of the underlying stock. The concept of “moneyness” helps classify options based on this relationship between the strike price and the underlying asset’s market price.

ATM Options and Their Characteristics

At-the-money options apply to both call and put options. An ATM call option has a strike price at or near the current price of the underlying asset, meaning the right to buy the asset is at a price equal to its current market value. Similarly, an ATM put option has a strike price at or near the current price of the underlying asset, granting the right to sell the asset at a price equal to its current market value. Both a call and a put option for the same underlying asset can be ATM simultaneously if their shared strike price matches the asset’s current market price.

A defining characteristic of ATM options is their delta, which measures an option’s price sensitivity to a $1 change in the underlying asset’s price. For ATM options, delta is generally around 0.50 for call options and -0.50 for put options. This implies that for every dollar the underlying stock moves, the ATM option’s price is expected to move by approximately 50 cents. ATM options also possess the highest time value, also known as extrinsic value. This value represents the portion of an option’s premium beyond its intrinsic value, accounting for factors like the time remaining until expiration and implied volatility.

ATM options are sensitive to changes in implied volatility, which reflects the market’s expectation of future price movements. They also experience the highest rate of time decay, measured by theta, meaning their extrinsic value erodes most rapidly as expiration approaches. This heightened sensitivity makes them dynamic instruments, as even small movements in the underlying asset or changes in market sentiment can significantly impact their value. The price of ATM options is also influenced by interest rates and dividends.

Comparing ATM with In-the-Money (ITM) and Out-of-the-Money (OTM)

Options are categorized into three states of “moneyness”: in-the-money (ITM), out-of-the-money (OTM), and at-the-money (ATM). This classification helps determine an option’s inherent value and immediate profitability. Each category carries distinct characteristics regarding intrinsic and extrinsic value, which together form an option’s total premium.

An option is considered in-the-money (ITM) when it possesses intrinsic value. For a call option, ITM occurs when the underlying asset’s price is higher than the strike price. Conversely, a put option is ITM when the underlying asset’s price is lower than the strike price. ITM options have both intrinsic value and typically some extrinsic value, although extrinsic value diminishes as the option moves deeper ITM and closer to expiration.

An option is out-of-the-money (OTM) when it has no intrinsic value. An OTM call option has a strike price above the current underlying asset price, while an OTM put option has a strike price below the current underlying asset price. These options derive their entire value from extrinsic factors, such as time until expiration and implied volatility. OTM options rely on the underlying asset’s price moving favorably before expiration to gain intrinsic value.

At-the-money (ATM) options represent the middle ground between ITM and OTM. ATM options have no intrinsic value, as the strike price and the underlying asset’s price are essentially equal. However, ATM options possess extrinsic value, accounting for their potential to become profitable if the underlying asset’s price moves in the desired direction before expiration. This unique position means that ATM options are highly sensitive to market movements and changes in implied volatility.