At-the-Money (ATM) Option

What is an At-the-Money (ATM) Option?

An At-the-Money (ATM) Option is a type of option contract whose strike price is equal to the current market price of the underlying asset. It represents a neutral position — the option has no intrinsic value, but it holds time value due to potential future price movements.

Key Takeaways

• ATM options have strike prices equal to the current market price.
• Carry no intrinsic value but retain maximum time value.
• Represent the point of highest sensitivity to volatility (vega).
• Commonly used for hedging and volatility trading strategies.
• Important reference point in options pricing models, such as Black-Scholes.

Understanding At-the-Money (ATM) Options

Options are financial derivatives giving the holder the right — but not the obligation — to buy (call) or sell (put) an underlying asset at a specific strike price before expiration. The moneyness of an option — in-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM) — determines its value.

• At-the-Money Call Option: The strike price equals the asset’s current market price.
• At-the-Money Put Option: Similarly, the strike price equals the market price.

Example:

If a stock trades at $100, a $100 strike call or put is considered at-the-money. Although these options have no intrinsic value, they carry time value based on volatility and time until expiration.

Key Concept — Time Value:

Time value reflects the potential for an option to become profitable before expiration. ATM options have the highest time value, as the underlying asset is equally likely to move in either direction.

Formula (If Applicable)

Option Value = Intrinsic Value + Time Value
For an ATM option:
Intrinsic Value = 0, so Option Value = Time Value.

In pricing models like Black-Scholes, ATM options are used as the baseline for measuring implied volatility.

Real-World Example

• Equity Options: A Microsoft (MSFT) call with a $350 strike is ATM if MSFT trades at $350.
• Index Options: The S&P 500 trading at 5,000 makes a 5,000 strike SPX option ATM.
• FX Options: A EUR/USD option is ATM if the strike equals the current exchange rate.
• Crypto Options: A Bitcoin call option at $40,000 is ATM if BTC trades at $40,000.

Importance in Business or Economics

At-the-money options are essential for options pricing, risk management, and trading strategies. They:

• Serve as reference points in implied volatility and delta calculations.
• Are widely used in hedging portfolios against short-term price fluctuations.
• Provide liquidity in options markets, as most trading volume occurs near ATM strikes.
• Offer maximum gamma, meaning their delta changes most rapidly with price movements.

Economically, ATM options reflect market expectations and volatility sentiment, offering insights into risk appetite and price uncertainty.

Types or Variations

• At-the-Money Call Option: Strike price = Current asset price.
• At-the-Money Put Option: Strike price = Current asset price.
• Near-the-Money Option: Slightly above or below current market price.
• Deep In/Out-of-the-Money: Used for contrast, where intrinsic value dominates (deep ITM) or time value dominates (deep OTM).

Related Terms

• In-the-Money (ITM) Option
• Out-of-the-Money (OTM) Option
• Option Premium
• Implied Volatility
• Black-Scholes Model

Sources and Further Reading

• Black, F. & Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. Journal of Political Economy.
• Chicago Board Options Exchange (CBOE) – Options Glossary: https://www.cboe.com
• Investopedia – At-the-Money (ATM) Options: https://www.investopedia.com/terms/a/atthemoney.asp
• CFA Institute – Derivatives and Risk Management.

Quick Reference

• Definition: Option with strike price equal to the current market price.
• Intrinsic Value: Zero.
• Time Value: Maximum.
• Used For: Volatility trading, hedging, and benchmark pricing.
• Examples: $100 strike call when stock trades at $100.

Frequently Asked Questions (FAQs)