What Does At the Money Mean in Options Trading?
Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
An at-the-money (ATM) option is one where the strike price is at or very near the current price of the underlying stock itself. At-the-money options have no intrinsic value, but they may have value due to their potential to go in the money before they expire.
Options traders must understand the difference between the three types of options’ “moneyness:” at the money, in the money, and out of the money.
Key Points
• An at-the-money (ATM) option has a strike price at or near the current price of the underlying stock, with no intrinsic value.
• ATM options typically have a delta of around 0.50, meaning their price moves about 50 cents for every dollar movement in the stock.
• ATM options can be less expensive than in-the-money (ITM) options but more costly than out-of-the-money (OTM) options.
• The volatility smile indicates that implied volatility is generally lower for ATM options compared to ITM or OTM options.
• Understanding ATM, ITM, and OTM options is crucial for effective options trading strategies.
What Is At the Money?
Conventionally, being at the money means that a given option’s strike price is identical to the price of the underlying stock itself. Both a call option and a put option can be at the money at the same time if their strike price is the same as the price of the stock.
In the age of decimal stock pricing, however, it is rare for an option’s strike price to exactly equal the price of the underlying stock. The at-the-money strike is usually considered the one closest to the stock’s price.
Understanding At the Money
Usually, an option that is at the money will have a delta of around 0.50 for an -call option and -0.50 for a put option. This means that for every $1 of movement of the underlying stock, the option will move about 50 cents.
Some options traders employ more complicated strategies, such as an at-the-money-straddle. This involves buying or selling both an at-the-money call and an at-the-money put on the same underlying asset with the same strike price and expiration date. This strategy offers the potential to profit from large price swings in either direction. It also carries the risk of loss if the underlying price stays near the strike, as both options may expire worthless, costing the investor the net premium paid. Be aware that investors can only buy, and not sell, options on SoFi Active Invest at this time.
💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.
At the Money vs In the Money vs Out of the Money
Usually there is one option strike price considered at the money, with any other strike prices being either in the money (ITM) or out of the money (OTM). The difference between ITM and OTM is that an in-the-money option is one that has intrinsic value, meaning it would be profitable to exercise it today.
A call option is in the money when the stock price is above the strike price, while a put options is in the money when the stock price is below the strike price.
Out-of-the money options have no intrinsic value and will generally expire worthless if they remain out of the money at expiration.
Consider the following call or put options for stock ABC with a current price of $55.
Option | Strike price | ATM / ITM / OTM |
---|---|---|
ABC Call option | $55 | At the money |
ABC Put option | $55 | At the money |
ABC Call option | $70 | Out of the money |
ABC Put option | $70 | In the money |
ABC Call option | $40 | In the money |
ABC Put option | $40 | Out of the money |
Recommended: Call vs. Put Options: The Differences
At the Money and Near the Money
An option is considered near the money usually if it is within 50 cents of the price of the underlying stock. However, it is common for investors to use the terms “near the money” and “at the money” interchangeably.
This is because stocks are priced to the nearest cent, while option strike prices are usually only to the nearest dollar or half-dollar, depending on the magnitude of the underlying stock price. It is rare for a stock to have an option that exactly matches any specific strike price.
Pricing At-the-Money Options
Because an at-the-money option has a strike price at or near the price of the underlying stock, it has no intrinsic value. Any value in an ATM option primarily consists of extrinsic value, meaning the portion of an option’s value determined by its potential to increase in value before it expires, measured by factors such as its time to expiration and implied volatility.
Options have the potential to provide greater returns, relative to the cost, than directly purchasing stock if the underlying asset moves favorably, but options investors also face the risk of losing their entire investment if the market moves unfavorably.
At the Money and Volatility Smile
A “volatility smile” is a graph that shows implied volatility across different strike prices, typically forming a curve that resembles a smile. This pattern generally shows that implied volatility is often lower for at-the-money options compared to those that are in-the-money or out-of-the-money. That said, it’s important to know that not all options fit into the volatility smile model.
Pros and Cons of Trading At-the-Money Options
Here are some pros and cons of trading at-the-money options:
thumb_up
Pros:
• Generally less expensive than in-the-money options, which have intrinsic value.
• Can offer a hedge against downside risk on stocks you already own.
• May offer a range of trading strategies, given their position between in-the-money and out-of-the-money options, which can affect risk and potential reward.
thumb_down
Cons:
• Higher premiums compared to out-of-the money options.
• ATM options have lower intrinsic value at purchase, and may expire worthless if the stock price doesn’t move.
• If the stock moves against your expectations, you could potentially lose your entire investment.
The Takeaway
Understanding the difference between options that are at the money, in the money and out of the money is crucial if you want to trade options through your brokerage account. Prices with these three different types of options contracts react differently to movements in the price of the underlying stock, so make sure you buy the right one based on your overall strategy.
Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.
Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.
FAQ
What does buying at the money mean?
When you buy an at-the-money option, you are buying an option whose strike price is at or near the price of the underlying stock. An option that is at the money generally has a delta value of around positive or negative 0.50, depending on if it is a call or a put. That means its price will move about 50 cents for every dollar that the price of the underlying stock moves.
How do at the money and in the money differ?
An at-the-money option is one whose strike price is at or near the price of the underlying stock. An in-the-money option is one with a strike price that would be exercised if the option closed today. An at-the-money call option is one whose strike price is at or lower than the stock price, while an at-the-money put option is one whose strike price is at or higher than the stock price.
Is it best to buy at the money?
There are several different strategies for trading options, and the strategy you trade will help decide whether it’s a good idea to buy at the money. It can certainly be profitable to buy or sell at-the-money options, but other strategies for making money with options exist as well.
Photo credit: iStock/DMEPhotography
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
SOIN-Q324-062
Read more