ATM Options: What They Are, How They Work, and Examples
AN
Summary:
At the money (ATM) options have strike prices that match the current market price of the underlying security. Both call and put options can be ATM. These options have no intrinsic value but do have extrinsic or time value. They are most sensitive to factors like time decay, volatility, and interest rates. Traders often use ATM options for constructing spreads and combinations, such as straddles. Options trading activity tends to be high when options are ATM. This article explores ATM options in detail, their characteristics, and their role in options trading.
What is at the money (ATM)?
At the money (ATM) refers to a situation in options trading where the strike price of an option is identical to the current market price of the underlying security. In simpler terms, an ATM option is neither in the money (ITM) nor out of the money (OTM); it’s right at the current market price.
ATM options can be both call and put options. For example, if the stock of XYZ Company is currently trading at $75, then the XYZ 75 call option and the XYZ 75 put option are both considered ATM options. These options have a delta of ±0.50, with a positive delta for call options and a negative delta for put options.
Characteristics of ATM options
ATM options possess several distinct characteristics:
- They have no intrinsic value: ATM options do not provide an immediate profit if exercised because their strike price matches the current market price.
- They have extrinsic or time value: Despite the absence of intrinsic value, ATM options retain value due to the time remaining before they expire.
Now, let’s delve deeper into the concept of ATM options and their significance in options trading.
Understanding at the money (ATM)
ATM is one of the three terms used to describe an option’s moneyness, alongside in the money (ITM) and out of the money (OTM).
In the money (ITM)
An option is considered ITM when its strike price is lower than the current market price of the underlying security. In this case:
- A call option is ITM when its strike price is less than the current market price.
- A put option is ITM when its strike price is greater than the current market price.
Out of the money (OTM)
Conversely, an option is considered OTM when its strike price is not favorable for immediate exercise:
- A call option is OTM when its strike price is higher than the current market price.
- A put option is OTM when its strike price is lower than the current market price.
ATM options, as mentioned earlier, are in a unique position. They don’t offer immediate profit like ITM options, but they aren’t entirely without value like OTM options. ATM options retain time value because there’s still time left before they expire.
Special considerations
Traders often use ATM options when constructing various options trading strategies, including spreads and combinations. One such strategy is the straddle, which involves buying both an ATM call and an ATM put option simultaneously.
Frequently asked questions
What is the significance of ATM options in options trading?
ATM options are crucial in options trading as they offer traders exposure to changes in the underlying security’s price. They are versatile and can be used in various trading strategies.
How do ATM options differ from in the money (ITM) and out of the money (OTM) options?
ATM options differ from ITM options in that they lack intrinsic value and require larger price movements to become profitable. They differ from OTM options in that they still have time value, whereas OTM options have no intrinsic or time value.
Are ATM options more sensitive to certain risk factors?
Yes, ATM options are highly sensitive to several risk factors, including time decay, changes in volatility, and fluctuations in interest rates. These factors can significantly impact the price and value of ATM options.
Key takeaways
- At the money (ATM) options have strike prices that match the current market price of the underlying security.
- They are versatile and can be used in various options trading strategies.
- ATM options are most sensitive to time decay, volatility changes, and interest rate fluctuations.
- They have no intrinsic value but retain extrinsic or time value due to the remaining time until expiration.
Share this post: