What is At The Money?

Definition

An at-the-money (ATM) option is a situation where the option's strike price is exactly equal to the current market price of the underlying security. The delta of an ATM option is ±0.50, positive for call options and negative for put options. Both call and put options can be ATM simultaneously. For example, if XYZ stock is trading at $75, then both the XYZ $75 call option and the XYZ $75 put option are considered ATM options. ATM options have no intrinsic value but retain time value until expiration, contrasting with in-the-money (ITM) or out-of-the-money (OTM) options.

Origin

The concept of options trading dates back to ancient Greece, but the modern options market began in the 1970s. The establishment of the Chicago Board Options Exchange (CBOE) in 1973 marked the start of standardized options trading. ATM options, as a specific state of options, became known to investors as the options market developed.

Categories and Features

ATM options are divided into ATM call options and ATM put options. A call option is ATM when its strike price equals the market price of the underlying asset; similarly, a put option is ATM when its strike price equals the market price of the underlying asset. The main feature of ATM options is that they have zero intrinsic value but still possess time value, making them attractive in volatile markets.

Case Studies

Case 1: Suppose in 2023, XYZ Company's stock price is $100. Both the XYZ $100 call option and the $100 put option are ATM options. Investors can use these options for hedging or speculation, depending on market expectations. Case 2: In 2022, ABC Company's stock price fluctuated significantly, and an investor purchased a call option with a strike price of $50 when ABC's stock price was exactly $50, making it an ATM option. The investor leveraged its time value for short-term trading.

Common Issues

Common issues investors face with ATM options include misunderstanding the relationship between intrinsic and time value. ATM options have no intrinsic value, but their time value can be affected by market volatility. Additionally, investors might overlook the impact of the delta value of ATM options on option price changes.