At The Money Meaning - ATM Explained

DailyForex.com Team

At the money refers to the situation where the strike price of an option is the same as or very similar to the current market price of the security. Both the call and put options can be at the money at the same time. ATM options describe the relationship between the strike price and the market price of a security. They offer a lucrative deal for traders who expect big movement in the stock. This option has no intrinsic value of its own.  Let us take a deeper look at the ‘at the money’ option — definition, examples, advantages, disadvantages, and more.

What is At the Money?

At the money is an option of moneyness in finance. Moneyness describes the relationship between the strike price and the market price of an underlying asset. At the money is the point where the strike price and the market price are the same. The strike price and the market price can be identical, similar, and slightly off by a small margin. All of them qualify as at the money options. 

Definition of At the Money

At the money meaning in finance refers to the situation when the strike price — that is the price at which it can be bought or sold — is identical to its market price now. It allows a delta of +0.50 call and -0.50 put. For instance, the at the money strike price of a security of market price $100 would be $100 as well. It is the put price as well as the call price.

Both call and put options can be ATM if they coincide with the market price. While it doesn't have an intrinsic value, it can still have an extrinsic value. It can be further contrasted with in the money and out of the money options. We will be discussing the two other options in detail below. Before we go further, let us understand the two crucial terms of an at the money option: call, put, and forward.

At the money call

A call option allows a trader to buy a security at the set price, i.e., the strike price. In at the money, the call option is identical or very similar to the market price of the security. Going by the above example, the at the money call option for a security market priced at $100 would be $100.

At the money put

Similarly, put options give the seller the right to sell a security at a price. It should be noted that it only gives them the right, not the obligation to sell. The at the money put option is the same as the market price of the security. Once again, the put price of the security from the example above will be $100 — the same as the market price.

At the money forward

At the money forward is an option whose strike price equals the market price in the forward market. It operates the same way in the forward market as it would in any other market.  At the money forwards are considered some of the most liquid forwards in the market. They are easy to value and offer the potential to earn with small gains.

Examples of At the Money

An example of at the money can be if the market price of a stock is $10. The call option of $10 or $10.02 is at the money. Similarly, $10 or $9.99 is an at the money put option. Sometimes, the phrase ‘near the money’ is also used to describe prices of options that are within 50 cents of being considered at the money. For instance, if the market price of a security is $25. Then call and put prices of $25.50 and $24.50 can be called near the money. However, they can be called at the money all the same.

What Are Advantages and Disadvantages of the At the Money Option?

Given below are the advantages and disadvantages of trading at the money options that you should consider as a trader before venturing into the market.

Advantages

The benefits of at the money options are as follows:

1. Low Risk - At the money is an ideal option for beginners and risk-averse traders. Since the changes in the price of the underlying security are very minuscule in nature, you can invest with more accuracy and assurance. 

2. Potential to earn big - If you study the market changes diligently, you have the potential to earn big with the money options. They are also cheaper than in the money options while both capitalize on small price changes of the market. So, you also get a chance to earn big margins with at the money options. 

3.Time value - While it is prone to volatile market movements, it also gives you a good time window to execute your strategies and make gains. If you are good at forecasting, you can earn well with at the money. 

Disadvantages

There are always two sides to a coin. As you look at the advantages of at the money options, you should also consider its disadvantages:

1.Pricier than out of the money option - At the money options cost more than out the money options. The latter is known for capitalizing on big changes in the market and giving good gains to investors. Compared to it, at the money appears to be a pricier investment with smaller returns. 

2.Volatile market - Even though at the money deals with very small market changes, it can still be victim to volatile market changes if you are not prepared enough. 

Understanding At the Money Straddles

A straddle is a strategy of buying both call and put options for the same strike price and same expiration date for a security. It is considered a neutral strategy that is profitable in the event of the stock rising or falling from its strike price by more than the total premium paid by the trader.  At the money straddles are usually long straddles. A trader will buy an ATM call and ATM put with the same strike price as well as the expiration date. It is done because the underlying stock is expected to move quite a lot before the expiration date. This will give you plenty of opportunities to make profits. 

What Is the Difference Between the At the Money Option and Others?

At the money, in the money, and out of the money are the three major options available. Here is an analysis of how at the money option differs from the other two.

At the money vs in the money

While at the money options have the strike price and market price as the same, in the money options have the strike price as the more favorable options. This means that in in the money option, the market price is above the strike price for call options. Similarly, the market price is below the strike price for put options.  As a trader, both at the money and in the money are favorable options if you are looking for small gains. 

At the money vs out of the money

Out of the money options are those where the strike price of an underlying security is yet to be reached. It has no intrinsic value, only an extrinsic value. So, the call option in out of the money option is below the strike price and the put option is above the strike price.  Profit with out of the money options depends on the assumption of whether the strike price will be achieved or not. If it does, it can help you make big gains. Otherwise, for smaller gains, both at the money and in the money are favorable options.

The following illustration compares the three types of options:

How to Price at The Money Options?

ATM options only have an extrinsic value and no intrinsic value. That value is affected by the volatility of the market in each period and the passage of time. For example, if the security is market priced at $10 and you purchase it as an ATM call option of 50 cents, the 50 cents becomes its extrinsic value. 

Conclusion

At the money is referred to as a situation when the strike price and market price of a security are the same. Its call and put price are also identical or similar.  At the money is fundamentally different from in the money and out of the money options. Extrinsic value and the volatility of the market help set its price. It is a good option for traders who do not want to take a lot of risk in the market. It allows them to exploit small changes in the market to make consistent and big gains. 

FAQs

1. What is “buy at the money”?

When you buy at the money, you buy an option whose strike price is the same as the market price of the underlying stock. It may be near the same value or identical. 

2. What is the delta of an at the money option?

The delta of an option refers to the change in its value due to various factors. The delta of an at the money option is +50 cents or - 50 cents. It measures the volatility of the market. 

3. Should I buy at the money or in the money or out of the money options?

All three options serve benefits in different cases. Out of the money options are better when there is a substantial increase in the price of an underlying stock. At the money and in the money, options are better when there is expected to be a smaller increase in the price of the security. 

DailyForex.com Team
The DailyForex.com team is comprised of analysts and researchers from around the world who watch the market throughout the day to provide you with unique perspectives and helpful analysis that can help improve your Forex trading.

Did you like what you read? Let us know what you think!

exclamation mark

Please make sure your comments are appropriate and that they do not promote services or products, political parties, campaign material or ballot propositions. Comments that contain abusive, vulgar, offensive, threatening or harassing language, or personal attacks of any kind will be deleted. Comments including inappropriate will also be removed.

0 User comments

exclamation mark

Please make sure your comments are appropriate and that they do not promote services or products, political parties, campaign material or ballot propositions. Comments that contain abusive, vulgar, offensive, threatening or harassing language, or personal attacks of any kind will be deleted. Comments including inappropriate will also be removed.

Read more
Add new comment
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.