What is At The Money (ATM)?
At the money (ATM) is a situation where the exercise price of an option is identical to the price of the underlying security. The call and put options can be simultaneously ATM. For example, if the XYZ share is trading at $ 75, the XYZ 75 call option is in the money, just like the XYZ 75 put option. An ATM option has no intrinsic value, but it can always have a time value before it expires. Option trading activity tends to be high when the options are ATM.
At the money is one of the three terms used to describe the relationship between the exercise price of an option and the price of the underlying security, also called the option currency. Options can be in the money (ITM), out of the money (OTM) or in the money. ITM means that the option has intrinsic value. OTM means that the option has no intrinsic value. Simply put, money options are not able to profit if they are exercised, but they still have value because there is time left before they expire, so they may still end up in the ‘money.
The intrinsic value of a call option is calculated by subtracting the exercise price from the current price of the underlying security. 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 in the money when the exercise price of the option is lower than the current price of the underlying security. Conversely, a put option is in the money when the exercise price of the option is higher than the share price of the underlying security. A call option is out of the game when its exercise price is higher than the current price of the underlying security. A put option is out of the game when its strike price is lower than the current price of the underlying asset.
Key points to remember
- At the money level, options have no intrinsic value, but they always have a time value.
- Costs for monetary options are generally higher than those for monetary options, as they are closer to profitability over the remaining time.
- At the money level, the options are more attractive when a trader expects a significant movement in a stock.
At the money and near the money
The term “near money” is sometimes used to describe an option less than 50 cents from being silver. For example, suppose an investor buys a call option with an exercise price of $ 50.50 and the price of the underlying stock trades at $ 50. The call option would be close to cash. The option would be close to silver if the price of the underlying stock traded between around $ 49.50 and $ 50.50, in this case. The near money and silver options are attractive when traders expect a big move. Even further options for money can also see a jump when a swing is scheduled.
Option prices for At The Money Options
The price of an option is made up of intrinsic and extrinsic value. Extrinsic value is sometimes called time value, but time is not the only factor to take into account when trading options. Implied volatility also plays an important role in pricing options.
Similar to OTM options, ATM options have only an extrinsic value because they have no intrinsic value. For example, suppose an investor purchases an ATM call option with an exercise 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 that volatility and price remain stable, the closer the option expires, the less extrinsic it has. If the price of the underlying exceeds the strike price, at $ 27, the option now has $ 2 intrinsic value, plus the extrinsic value that remains.
Investopedia University provides a more detailed explanation of how options are priced.