At The Money (ATM)

A situation when the strike price of an option is equal to the current market price of the underlying asset

What is At The Money (ATM)?

At the money (ATM) describes a situation when the strike price of an option is equal to the underlying asset’s current market price. It is a concept of moneyness, which describes the position between the strike price of an option and the market price of the underlying asset.

 

At The Money

 

A call and put option with the same underlying asset can be at the money at the same time. Options are traded more frequently when they are at the money.

 

Summary

  • An option is at the money when the strike price of an option is equal to the underlying asset’s current market price.
  • At-the-money or out-of-the-money options have no intrinsic values, while in-the-money options have positive intrinsic values.
  • A call option and a put option with the same underlying asset can be at the money simultaneously.

 

Value of At-The-Money Options

The total value of an option, which is also the option price, consists of two parts: an intrinsic value and a time value. The intrinsic value of an option, also known as the monetary value, is the difference between the strike price and underlying asset price, assuming the option is exercised immediately.

For example, the current (spot) price of an asset is $120, and the call option and put option share the same strike price at $100. The call option has a positive intrinsic value of $20, as it gives the right to purchase an asset that is worth $120 at the price of $100. The put option has no intrinsic value since it will not be exercised nor create any profits.

The time value of an option is the value left after subtracting the intrinsic value from the total value. The further the expiration date, the higher the time value is. For a European option, when the intrinsic value of an option is greater than its total value, the time value is negative. For an American option, the trader can exercise the option whenever the time value is turning to be negative.

 

Time Value = Total Value – Intrinsic Value

 

An option has no intrinsic value when it is at the money. As the strike price of the option and the current market price of the underlying asset are the same, the option holder cannot make any profit by exercising the option, which means an at-the-money option only has a time value.

 

At The Money and Other Moneyness

Two other concepts of moneyness are in the money (ITM) and out of the money (OTM). When an option is in the money, it has a positive intrinsic value and time value. When an option is out of the money, it has no intrinsic value, which means the investor cannot make any profit by exercising the option.

For call options, investors benefit by exercising when the asset spot price is higher than the strike price (positive intrinsic value) and do not exercise when the spot price is below the strike price (no intrinsic value). Hence, call options are in the money when the spot price exceeds the strike price, and are out of the money when the spot price is below the strike price.

Conversely, investors exercise their put options at a market price lower than the strike price to make profits, as they can sell an asset at a price higher than what they are currently worth. The options are in the money at this point. When the spot price is above the strike price, the investors will not exercise, and thus the intrinsic value is zero. The options are out of the money at this point.

 

At The Money - Moneyness

 

A put option and a call option with the same underlying asset and strike price can be at the money simultaneously, but they cannot be in the money or out of the money at the same time. For example, if a call and a put of a security both have a strike price of $100 when the underlying security is currently traded at $100, the call and put are both at the money.

If the security’s price moves up, the call option is in the money with an intrinsic value equal to spot price minus strike price, and the put option is out of the money at the same time. If the price moves down, the call option is out of the money, and the put is in the money with an intrinsic value equal to strike price minus sport price.

 

At The Money and Volatility Smile

The implied volatility tends to be the lowest when an option is at or near the money and increases when the option moves further out of the money or in the money. The relationship between moneyness and implied volatility can be plotted into a u-shaped curve, which is known as the “volatility smile.”

 

At the Money - Volatility Smile

 

The implied volatility smile does not apply to all options. The currency options and equity options with short expiration terms are more likely to take on a u-shaped volatility curve. There are also cases of volatility skew or smirk, which show higher volatility when an option goes further either in the money or out of the money.

Implied volatility is a factor that drives option pricing. The higher the implied volatility, the higher the option price is. Comparing options with different strike prices but the same characteristics, the volatility smile suggests that the in-the-money and out-of-the-money options tend to have higher option prices than the at-the-money options.

 

More Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Options: Calls and Puts
  • Time Value of Money
  • Trading Mechanisms
  • VIX

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