This page explains the term at-the-money (ATM), how to tell which options are at the money, and their common characteristics.
Every option is either in the money (ITM), out of the money (OTM), or at the money (ATM). The so called moneyness of an option depends on the relationship between its strike price and the current market price of the underlying security.
Call Option Moneyness
A call option is in the money when underlying price is greater than its strike price. This means that exercising the option allows you to get the underlying stock for the option strike price, which is cheaper than the stock’s price in the stock market (the underlying price). Therefore the option has positive intrinsic value.
Conversely, when underlying price is below a call option’s strike price, that option is out of the money and has no intrinsic value. Exercising such option wouldn’t make much sense, because you could get the same stock cheaper in the stock market, without using the option.
Put Option Moneyness
The moneyness of put options is opposite, as puts represent rights to sell the underlying security. A put option is in the money when underlying price is below its strike price, and out of the money when underlying price is above the strike.
Which Options Are At the Money
As the prepositions might suggest, at the money options are something in between in the money and out of the money options.
An option is at the money when underlying price is equal to, or very close to, its strike price. This applies to both calls and puts.
At the Money Options in Practice
Notice the “or very close to” part in the above definition.
In practice, option strike prices are discrete and come in regular intervals. For instance, available strikes for options on a US traded stock currently trading in the $50’s would typically be in $5 intervals, such as $40, $45, $50, $55, $60, $65. It is clearly very rare for the underlying price to exactly equal a strike. Unless the stock price is exactly $40.00, or $45.00, and so on, there aren’t any options which are exactly at the money. Therefore, in practice, it is common to consider the strike that is nearest to the current underlying price to be “at the money”, although the strike does not exactly equal underlying price.
A more practical definition of at the money options is therefore:
An option is at the money when its strike is closest to underlying price (among all the available strikes).
Consider the strikes mentioned above ($40, $45, $50, $55, $60, $65) and the underlying stock trading at $51.28 at the moment. The $50 strike call and put options would be considered at the money, although their strike is slightly lower than underlying price. The $50 strike call option technically meets the definition of in the money options (it is in the money by $1.28 – its intrinsic value is $1.28), while the $50 strike put is technically out of the money. However, $50 is the strike that is closest to the current underlying price, and therefore the $50 strike options are considered at the money.
Characteristics of ATM Options
At the money options are very special. Being right at the border between ITM and OTM options, they have some unique characteristics.
Time Value and Time Decay
They typically have highest time value and high rate of time decay (measured by the Greek letter theta). While ITM and OTM options often lose most of their time value long before expiration, ATM options keep considerable amounts of time value until the last days (and hours) before expiration, as it only takes a small move in underlying price for the option to get into the money and gain substantial intrinsic value. Time decay of ATM options often accelerates close to expiration.
Delta and Gamma
ATM options are very sensitive to changes in underlying price, although less sensitive than ITM options. This is measured by the Greek letter delta. Although delta of ATM options is smaller (for calls, and less negative for puts) than delta of ITM options, it has steepest slope (changes the fastest) at the money.
Sensitivity of delta to changes in underlying price is measured by the Greek letter gamma – a very important risk measure for option portfolios. Gamma is mathematically the second derivative of option premium with respect to underlying price or, very simply said, it measures how fast losses can accelerate when market moves against you. Gamma is highest at the money.
ATM options are usually among the most actively traded. They tend to have highest trading volume and open interest, and narrowest bid-ask spreads.
Note that for very liquid underlyings with small strike intervals, such as SPY options (with SPY trading in the 200’s strike intervals are as small as $0.50), the most active options are often the round strikes which are closest to the current underlying price. For instance, wit SPY trading at 271.80, the most active strikes would often be $270 and $275, even with strikes such as $271.50 or $272 also available and closer to underlying price.