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What Are At The Money Options ( ATM )?: Summary
Definition Of At The Money Options ( ATM )
Stock Options whose strike price is exactly at the prevailing price of the underlying stock.
At The Money Options ( ATM ) Introduction
At The Money Options ( ATM ) is one of the three option moneyness states that all option traders have to be familar with before considering actual options trading. The other two option moneyness states are : Out Of The Money ( OTM ) options and In The Money ( ITM ) options.
Understanding how options are priced makes this topic easier to understand.
In fact, trading At The Money Options ( ATM ) is the most fundamental options trading method available which gives a very good risk / reward balance.
Learn how to trade At The Money options.
For example, if QQQQ is trading at $50, it's $50 strike price call and put options are At The Money. Usually, this situation is very rare as stock prices changes every single minute. Industry experts usually refer to strike prices within a few cents of the prevailing stock price as At The Money too. At The Money is also the only status where both call option and put option occurs together. Usually, when a call option is In The Money ( ITM ), the same strike put option would be Out Of The Money ( OTM ) and when a put option is In The Money ( ITM ), the same strike call option would be Out Of The Money ( OTM ). But, when a call option is At The Money, the same strike put option would also be At The Money.
A strictly At The Money option, like in the above example, would contain only extrinsic value and no intrinsic value. Also, as At The Money options have the equal potential to expire In The Money ( ITM ) or Out Of The Money ( OTM ), their Delta Value is usually equal to or very near 0.50. Because an option is only At The Money when its strike price is exactly the same as the spot price of the underlying stock, most "At The Money" options are actually only "Near The Money".
Read All about Option Greeks for more information.
What Happens When A Call or Put Option Expires At The Money ( ATM )?
This is an extremely rare and tricky situation as it is rarely possible for any option to expire right At The Money. When your Call or Put Options expires At The Money ( ATM ), the option expires worthless.
Advantages Of Trading At The Money Options ( ATM )
1. Cheaper in terms of absolute dollars than In The Money ( ITM ) options. Because At The Money Options ( ATM ) consists of no intrinsic value, it would cost less per contract than an In The Money ( ITM ).
2. Higher percentage gain on the same move of the underlying stock than In The Money ( ITM ).
3.Higher possibility of expiring In The Money ( ITM ) and yielding a profit than Out Of The Money ( OTM ) options.
Disadvantages Of At The Money Options ( ATM )
1. Lower Delta value than In The Money ( ATM ) options. A higher delta value means that a single In The Money Option ( ITM ) would gain more value than a single At The Money ( ATM ) or Out Of The Money ( OTM ) option with the same move on the underlying stock.
2. Higher risk of loss than In The Money ( ITM ) options. Because In The Money Options ( ITM ) contains intrinsic value, you will still have the intrinsic value remaining by expiration if the underlying stock stayed stagnant while an Out Of The Money ( OTM ) option or At The Money ( ATM ) option would expire completely worthless, losing all your money in it.
The advantages and disadvantages of At The Money Options are condensed and governed by its Options Leverage which can be mathematically measured.