What Does “At the Money (ATM)” Mean?
“At the Money” (ATM) is a term used in options trading to describe a situation where the strike price of an options contract is equal to—or nearly equal to—the current market price of the underlying asset. This can apply to both call options (which give the holder the right to buy the asset) and put options (which give the holder the right to sell the asset).
Significance of ATM Options
ATM options are important for several reasons:
- Maximizing Gamma: ATM options have the highest gamma, meaning they are the most sensitive to changes in the underlying asset’s price.
- Liquidity: These options are usually the most actively traded, offering high liquidity.
- Neutral Positioning: They are often used in neutral or delta-neutral trading strategies.
Examples
To better understand how ATM options work, here are two examples:
Example 1: ATM Call Option
You purchase a call option for a stock with a strike price of $100. If the stock’s current market price is exactly $100, the call option is “at the money.” If the stock price moves up or down by a small amount, it’s still considered “nearly” ATM, depending on trading conditions and timing.
Example 2: ATM Put Option
Similarly, if you purchase a put option for a stock with a strike price of $100 and the stock’s current market price is around $100, the put option is “at the money.” Small movements around the $100 mark can keep the option nearly ATM.
Frequently Asked Questions About At the Money (ATM) Options
1. Why are ATM options often the most actively traded?
ATM options are the most actively traded because they have the highest sensitivity to the underlying asset’s price changes (gamma) and provide the highest liquidity.
2. How do ATM options compare to ITM (In the Money) and OTM (Out of the Money) options?
ATM options have a strike price close to the market price, whereas ITM options have more intrinsic value, and OTM options have only time value but no intrinsic value. This makes ATM options unique for various trading strategies.
3. What is the impact of time decay on ATM options?
Time decay (theta) impacts ATM options significantly as they often experience greater theta decay compared to ITM or OTM options, especially close to expiration.
4. How do market conditions affect ATM options?
Market conditions like volatility can impact the price and attractiveness of ATM options. Higher volatility usually increases the premium of an ATM option.
5. Are ATM options suitable for beginners in options trading?
ATM options can be suitable for beginners because they typically involve smaller premiums than ITM options and can provide a balanced perspective on trading strategies.
Related Terms
In the Money (ITM)
An options contract is considered ITM if it has intrinsic value—i.e., a call option is ITM if the underlying asset’s price is above the strike price, and a put option is ITM if the underlying asset’s price is below the strike price.
Out of the Money (OTM)
An option is deemed OTM if it has no intrinsic value. For call options, the underlying asset’s price is below the strike price, and for put options, it is above the strike price.
Exercise Price
The price at which the underlying asset can be purchased (call option) or sold (put option) as specified in the options contract.
Underlying Asset
The financial instrument (e.g., stock, bond, commodity) on which an options or futures contract is based.
Gamma
A measure of the rate of change of an option’s delta concerning the price of the underlying asset.
Online Resources
- Investopedia: Options Basics Tutorial: Learn the fundamentals of options trading, including detailed explanations of ATM, ITM, and OTM options. Investopedia Options Basics
- The Options Industry Council (OIC): Offers a plethora of resources for options trading education and strategies. OIC Resources
Suggested Books for Further Studies
- “Options Trading: The Bible” by David Reese: A comprehensive guide to mastering options trading, covering all critical aspects, including ATM options.
- “Options, Futures, and Other Derivatives” by John C. Hull: A staple in finance literature, providing a thorough grounding in financial derivatives.
- “The Option Trader’s Workbook: A Problem-Solving Approach” by Jeffrey Augen: This book uses real-world scenarios to address common problems faced in options trading.
Accounting Basics: “At the Money (ATM)” Fundamentals Quiz
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