Understanding At-The-Money Options: Definition, Examples, and Trading Tips
What Is an At-The-Money Option?
An at-the-money (ATM) option is an options contract whose strike price is equal, or very close, to the current market price of the underlying asset. Because the option offers neither intrinsic profit nor loss at that moment, its entire value is made up of time value and implied volatility.
How to Identify ATM Options
Locating an ATM option is straightforward: simply compare available strike prices with the asset’s last traded price. The strike that matches or sits one increment above or below the spot price is considered at-the-money. Option chains on broker platforms usually highlight the ATM row automatically.
Example
Suppose Apple stock trades at $180. A call or put option with a $180 strike is ATM. If the next strike choices are $177.50 and $182.50, both can also be treated as near-ATM depending on liquidity and pricing conventions at your brokerage.
Why ATM Options Matter to Traders
ATM options command the highest extrinsic (time) value, making them popular with buyers seeking maximum leverage on expected price moves. For sellers, the rich premium of ATM contracts provides greater income potential, though it also carries higher assignment risk if the underlying price moves unfavorably.
Risks and Rewards
Because an ATM option’s delta hovers around 0.50, price movement in the underlying delivers a balanced mixture of probability and payout. A one-point move in the stock typically changes the option’s price by roughly half a point. However, theta decay accelerates as expiration nears, eroding premium quickly if the underlying stagnates.
Key Takeaways
ATM options sit at the intersection of probability and payoff, making them ideal for strategies like straddles, strangles, and gamma scalping. Always evaluate implied volatility, time to expiration, and your risk tolerance before trading. Proper position sizing and exit planning remain critical for managing the heightened sensitivity of at-the-money contracts.