At the Money (ATM) in Options Trading: Definition and Key Insights

What Is At the Money (ATM)?

At the money (ATM) occurs when an option's strike price is the same as the underlying security's market price, impacting options trading with detailed strategic insights. ATM options, central to decisions involving market movements, possess a delta of ±0.50 and are used by traders to construct varied strategies.

How At the Money (ATM) Options Work

At the money (ATM), sometimes referred to as "on the money", is one of three terms used to describe the relationship between an option's strike price and the underlying security's price, also called the option's moneyness.

Options can be in the money (ITM), out of the money (OTM), or ATM. ITM means the option has intrinsic value and OTM means it doesn't. Simply put, ATM options are not in a position to profit if exercised, but still have value—there is still time before they expire so they may yet end up ITM.

A call option's intrinsic value is the current price of the underlying security minus the strike price. Conversely, a put option's intrinsic value is the strike price minus the current price of the underlying asset.

A call option is ITM when the option's strike price is less than the underlying security's current price. Conversely, a put option is ITM when the option's strike price is greater than the underlying security's stock price. Meanwhile, a call option is OTM when its strike price is greater than the current underlying security's price and a put option is OTM when its strike price is less than the underlying asset's current price.

Important Factors for Trading At the Money (ATM) Options

Traders often use ATM options to build spreads and combinations. For example, a straddle involves buying or selling both an ATM call and put.

ATM options are the most sensitive to various risk factors, known as an option's "Greeks". ATM options have a ±0.50 delta and high gamma, meaning their delta shifts quickly from ±0.50 as the underlying asset moves, especially as expiration approaches.

ATM options are the most sensitive to time decay, as represented by an option's theta. Moreover, their prices are most responsive to changes in volatility, especially for farther maturities, and is expressed by an option's vega. Finally, ATM options are also most sensitive to changes in interest rates, as measured by the rho.

Differentiating At the Money (ATM) and Near the Money Options

"Near the money" describes an option within 50 cents of being ATM. For example, if an investor buys a call option with a $50.50 strike price and the stock is trading at $50, it's considered near the money.

In this example, the option is near the money if the stock trades between $49.50 and $50.50. Near the money and ATM options appeal to traders expecting large movements. Options further OTM may also rise with anticipated swings.

Pricing Considerations for At the Money (ATM) Options

An option's price is made up of intrinsic and extrinsic value. Extrinsic value is sometimes called time value, but time is not the only factor to consider when trading options. Implied volatility also plays a significant role in options pricing. 

Similar to OTM options, ATM options only have extrinsic value because they possess no intrinsic value. For example, assume an investor purchases an ATM call option with a strike price of $25 for a price of 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 the price stay steady, the closer the option gets to expiry the less extrinsic value it has. If the price of the underlying moves above the strike price to $27, the option now has $2 of intrinsic value, plus whatever extrinsic value remains.

The Bottom Line

At the money (ATM) options, where the strike price matches the current market price of the underlying security, are a crucial concept in options trading. These options, which have a delta of ±0.50, are highly sensitive to changes in factors such as time decay, implied volatility, and interest rates.

While ATM options have no intrinsic value, they maintain extrinsic value and are useful for traders expecting significant price movements. Understanding how ATM options function and the role of gamma, theta, and vega in their pricing is essential for leveraging them effectively in strategies such as straddles and other option spreads.