An at-the-money (ATM) option is one where the strike price is at or very near the current price of the underlying stock itself. At the money options have no intrinsic value.
Options traders must understand the difference between the three types of options “moneyness: “at the money,” “in the money,” and “out-of-the money.”
What Is At the Money?
At the money means that a given option’s strike price is identical to the price of the underlying stock itself. Both a call option and a put option can be at the money at the same time, if their strike price is the same as the price of the stock.
In this age of decimal stock pricing, it is rare for an option’s strike price to exactly equal the price of the underlying stock — so the at-the-money strike is usually considered the one closest to the stock’s price.
Understanding At the Money
Usually, an option that is at the money will have a delta of around 0.50 for an at the money call option and -0.50 for a put option. This means that for every $1 of movement of the underlying stock, the option will move about 50 cents.
Some options traders employ more complicated strategies, such as an at the money straddle, which involves buying or selling both an at-the-money call and an at-the-money put with the same expiration date.
At the Money vs In the Money vs Out of the Money
Usually there is one option strike price considered at the money, with any other strike prices being either in the money (ITM) or out of the money (OTM). The difference between ITM and OTM is that an in-the-money option is one that has intrinsic value, meaning it would be profitable to exercise it today.
For calls, being in the money means a strike price lower than the stock’s price. For put options, a strike price that is higher than the stock’s price is considered in the money.
Out-of-the money options are just the opposite. They have no intrinsic value, and if an option is out of the money at expiration it will expire worthless.
Consider the following call or put options for stock ABC with a current price of 55.
|Option||Strike price||ATM / ITM / OTM|
|ABC Call option||55||At the money|
|ABC Put option||55||At the money|
|ABC Call option||70||Out of the money|
|ABC Put option||70||In the money|
|ABC Call option||40||In the money|
|ABC Put option||40||Out of the money|
Recommended: Call vs. Put Options: The Differences
At the Money and Near the Money
An option is considered near the money usually if it is within 50 cents of the price of the underlying stock. However, it is common for investors to use the terms “near the money” and “at the money” interchangeably.
This is because stocks are priced to the nearest cent, while option strike prices are usually only to the nearest dollar or half-dollar, depending on the magnitude of the underlying stock price. So it is rare for a stock to have an option that exactly matches any specific strike price.
Pricing At-the-Money Options
Because an at-the-money option has a strike price exactly the same as the price of the underlying stock, it has no intrinsic value. Any value in an ATM option is made up of extrinsic value or time value. While you could make more money with an option than just by purchasing the stock if the stock moves in the direction you anticipate, you also stand to completely lose your investment if the stock moves against you.
At the Money and Volatility Smile
The volatility smile refers to the phenomenon that implied volatility is generally lower for at-the-money options than it is for options that are in the money or out of the money. The term “volatility smile” reflects a graph of implied volatility against the strike price of an option, which appears as an upwards-opening parabola, similar to a smile.
Pros and Cons of Trading At-the-Money Options
Here are some pros and cons of trading at-the-money options:
|Pros of trading at-the-money options||Cons of trading at-the-money options|
|Less-expensive than at-the-money options||More expensive than out-of-the-money options|
|Can protect you from downside risk on stocks you already own||ATM options have no intrinsic value and may expire worthless|
|If the stock moves in a different direction than you anticipate, you could lose your entire investment|
Understanding the difference between options that are at the money (ATM), in the money (ITM) and out of the money (OTM) is crucial if you want to trade options through your brokerage account. Prices with these three different types of options contracts react differently to movements in the price of the underlying stock, so make sure you buy the right one based on your overall strategy.
While SoFi does not currently offer options trading, it does offer an opportunity to get started building an investment portfolio. You can use the SoFi Invest® online brokerage to purchase stocks, exchange-traded funds, cryptocurrency, and initial public offerings directly from your phone.
What does buying at the money mean?
When you buy an at-the-money option, you are buying an option whose strike price is at or near the price of the underlying stock. An option that is at the money generally has a delta value of around positive or negative 0.50, depending on if it is a call or a put. That means its price will move about 50 cents for every dollar that the price of the underlying stock moves.
How do at the money and in the money differ?
An at-the-money option is one whose strike price is at or near the price of the underlying stock. An in-the-money option is one with a strike price that would be exercised if the option closed today. An at-the-money call option is one whose strike is lower than the stock price, while an at-the-money put option is one whose strike price is higher than the stock price.
Is it best to buy at the money?
There are several different strategies for trading options, and the strategy you trade will help decide whether it’s a good idea to buy at the money. It can certainly be profitable to buy or sell at-the-money options, but other strategies for making money with options exist as well.
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