What is At The Money (ATM)

When an options strike price and the underlying asset’s price are the same

In short:

At the money (ATM) is a term used to refer to options where the price of the underlying asset is at or very near the strike price of the option. This is one of the three terms to describe the moneyness of options contracts, or where the price of the underlying asset is with respect to the strike price.

Despite being very close to being able to be exercised, ATM options have no intrinsic value. Instead, ATM options are often used when a trader expects a large price movement in the underlying asset.

Alternative terms to describe the moneyness of an options contract are in the money (ITM) and out of the money (OTM).

Key Points

• At the money (ATM) is where the price of an underlying asset is at or very near the strike price of an options contract.

• ATM options are attractive to traders who believe there will be a very large movement in the underlying assets price.

• ATM is one of three terms to describe the moneyness of an option. In the money (ITM) and at the money (ATM) are the others.

In-depth:

Understanding At The Money (ATM)

At the money (ATM) refers to when the strike price of an option and the price of the underlying asset are very near to the same value.

For example, say we are looking at a Microsoft (MSFT) 295 call option and the current price of MSFT is $295/share, this option would be deemed to be ATM. This is because the strike price of the call option is the same as the price of the underlying asset (MSFT stock).

An additional point is the ATM MSFT call option is not in a position to be profitable as it has no intrinsic value. Since a call option gives the buyer the right but not the obligation to buy the underlying stock at the strike price, with the strike and the underlying price being equivalent there is no gain to be had by exercising the option.

The value of an ATM option, therefore, comes from two things, the likelihood of the option ending up ITM and the time value of the option.

Options that are closer to being ITM trade for a premium to options that are deep OTM, there is a reason for this. More times than not, the closer you are to something the more likely you are to achieve it. With options, the closer the underlying asset is to the strike price the more likely it will end up ITM.

Take MSFT for example, with the stock price being $295 there is a very high likelihood the share price will be higher than 295 at some point in the not-to-distant future. This brings the second place of value for an option, time.

ATM options only have value if there is still time for the option to end up ITM, otherwise, the option expires worthless. The more time until the option expires the more valuable the option since there is more time for things to move in favor of the option buyer.

In The Money (ITM) vs At The Money (ATM)

So, what’s the difference between in-the-money (ITM) options and at-the-money (ATM) options?

The major difference between ITM and ATM options is that ITM options have intrinsic value and ATM options do not. Or, more simply put, ITM options are in more of a position to profit since there is a difference between the price of the underlying asset and the strike price which benefits the option owner. ATM options on the other hand are not yet in a position to directly benefit the option owner since the strike price and the asset price are equal.

Out Of The Money (OTM) vs At The Money (ATM)

So, what’s the difference between out-of-the-money (OTM) options and at-the-money (ATM) options?

OTM options and ATM options are more similar than ITM options. This is because both OTM and ATM options value is composed entirely of time value. Neither OTM nor ATM options can be exercised yet to the benefit of the option owner. The main reason ATM options will trade higher than similar OTM options is because ATM options have a higher likelihood of ending up ITM than OTM options.

Frequently Asked Questions