At the money options sit right at the boundary between profitability and loss. They have special characteristics that make them popular among both option buyers and sellers. Understanding ATM options helps you pick the right strike price for your trades.
What Does At The Money Mean?
An option is "at the money" (ATM) when its strike price equals (or is very close to) the current stock price. Both calls and puts with the same strike are ATM when the stock is trading at that price.
Simple definition: ATM options have strike prices that match the current stock price. If a stock is at $100, the $100 strike call and put are both at the money.
ATM Options in Practice
Since stocks rarely trade at exact strike prices, traders consider the nearest strike to be "at the money."
Example: Identifying ATM Options
Stock ABC is trading at $73.50. Available strikes are $70, $72.50, $75, $77.50:
- $72.50 strike: Closest to current price - considered ATM
- $75 strike: Also very close - sometimes called "near ATM"
- $70 strike: ITM for calls, OTM for puts
- $77.50 strike: OTM for calls, ITM for puts
Key Characteristics of ATM Options
Maximum Time Value
ATM options have the highest extrinsic (time) value of any strike. This is because there is maximum uncertainty about whether they will finish in or out of the money. The market charges the most premium for this uncertainty.
Delta Around 0.50
ATM calls have a delta near 0.50, meaning they move about $0.50 for every $1 the stock moves. ATM puts have a delta near -0.50. This makes them a balanced choice between leverage and risk.
50/50 Probability
ATM options have roughly a 50% chance of finishing in the money at expiration. This is why delta hovers around 0.50 - delta roughly approximates the probability of finishing ITM.
Highest Gamma
ATM options have the highest gamma, meaning their delta changes the fastest when the stock moves. Small stock movements cause significant delta changes for ATM options.
Highest Theta Decay
Because ATM options have the most time value, they also experience the most time decay in absolute dollar terms. If you own ATM options, you lose more to theta each day than with ITM or far OTM options.
Key trade-off: ATM options offer balanced risk/reward with moderate cost, but they have the most time value to lose. ITM options cost more but lose less to time decay. OTM options cost less but have lower probability of profit.
When to Use ATM Options
Directional Bets with Balance
ATM options offer a middle ground between expensive ITM options and risky OTM options. If you have moderate conviction about direction, ATM strikes are often a good choice.
Selling Premium
Because ATM options have the most extrinsic value, sellers can collect more premium. Strategies like straddles and strangles often use ATM strikes to maximize premium collection.
Neutral Strategies
If you expect the stock to stay near its current price, ATM options are the center of strategies like butterflies and iron condors.
Example: Comparing Strike Choices
Stock is at $100 with 30 days to expiration:
- $95 call (ITM): $7.50 ($5 intrinsic + $2.50 extrinsic), Delta 0.70
- $100 call (ATM): $4.00 (all extrinsic), Delta 0.50
- $105 call (OTM): $1.50 (all extrinsic), Delta 0.30
The ATM call has the most extrinsic value to lose but offers balanced exposure to stock movement.
ATM Options and the Greeks
Delta: The Sweet Spot
ATM options have delta around 0.50, giving you half the exposure of owning stock. This is often considered the "sweet spot" - enough exposure to profit from moves without the full risk of stock ownership.
Gamma: Maximum Sensitivity
ATM options have the highest gamma. This means small stock moves cause big changes in delta. ATM options can quickly become ITM (higher delta) or OTM (lower delta) with modest price changes.
Theta: Maximum Decay
ATM options lose the most time value each day. If you are long ATM options, theta works strongly against you. If you are short ATM options, theta works in your favor.
Vega: High Sensitivity to Volatility
ATM options are most sensitive to changes in implied volatility. When IV rises, ATM options gain the most value. When IV falls, they lose the most.
ATM Options for Straddles
A straddle involves buying both the ATM call and ATM put with the same expiration. This strategy profits from big moves in either direction.
Example: ATM Straddle
Stock at $50. You buy the $50 call for $2.50 and $50 put for $2.50:
- Total cost: $5.00 ($500 per straddle)
- Breakeven: Stock needs to move above $55 or below $45
- Max loss: $500 if stock closes exactly at $50
- Potential profit: Unlimited if stock moves significantly
ATM vs Slightly ITM or OTM
Sometimes traders prefer strikes slightly ITM or OTM instead of exactly ATM:
- Slightly ITM: Gives some intrinsic value as a cushion, slightly higher probability of profit
- Slightly OTM: Costs less, requires stock to move in your favor first
- Exactly ATM: Maximum extrinsic value, balanced characteristics
Your choice depends on your outlook, risk tolerance, and whether you are buying or selling options.
Analyze Your Strike Selection
Pro Trader Dashboard shows you how your trades perform by strike selection. See if ATM, ITM, or OTM options work best for your trading style.
Summary
At the money options have strike prices equal to the current stock price. They have the highest extrinsic value, delta around 0.50, and roughly 50% probability of finishing in the money. ATM options are popular because they offer balanced exposure - not too expensive like ITM options, not too risky like OTM options. They are commonly used in straddles, strangles, and as the center of spread strategies.
Compare with in the money options and out of the money options to choose the right strike for your trades.