At The Money Option Price – Definition

Cite this article as:"At The Money Option Price – Definition," in The Business Professor, updated February 19, 2019, last accessed October 19, 2020, https://thebusinessprofessor.com/lesson/at-the-money-option-price-definition/.

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At The Money (Options Price) Defined

At The Money Option Price refers to a situation where the strike price of an option is the same as that of the underlying security. If, for example, the stock of XYZ is trading at $75, then the call option of XYZ 75 is at the money as well as the put option of XYZ 75. An ATM may possess time value as it nears expiration although it lacks intrinsic value. If the option is ATM, the options trading activities tend to be higher.

A Little More On What is At The Money Options

ATM is among the three terms representing an option strike price’s relationship with the underlying security price, which is also known as the optional currency.

Denomination Difference

Options can be out of the money (OTM), in the money (ITM), or at the money. In ITM the option has intrinsic value and lacks it in OTM. This intrinsic value of a call is realized by subtracting the exercise price from the current price of the underlying security. In the case of the put option, the current price of the underlying asset is deducted from the strike price to get the intrinsic value.

If a call option’s strike price is lower than the current price of the underlying security, the option is in the money. On the other hand, a put option is considered in the money when the strike price of the option is higher than the current underlying security’s price. When the Strike price of a call option becomes higher than the underlying security’s current price, it is considered OTM. In the case of a put option, it is OTM if its strike price is lower than the underlying asset’s current price.

In some situations, ‘near the money’ is a term that is used to describe an option that is around 50 cents of being considered at the money. Assuming a call option purchased by an investor has a strike price of about $50.50 and an underlying stock price of $50, it will be considered to be near the money. The option would still be found near the money even if the underlying stock price trades between $49.50 and $50.50.

Option Pricing

The price of an option consists of both intrinsic and extrinsic value (sometimes referred to as time value). Implied volatility is also one of the factors that affect an option’s price. However, as stated earlier, ATM options only have extrinsic value.

For example, suppose an investor decided to purchase an ATM call option that has a $25 strike price for only 50 cents. The extrinsic value is 50 cents and is affected by time and implied volatility. Holding the volatility and the price constant, the option’s extrinsic value reduces as it nears expiry. However, if the underlying price rises above the strike price, let’s assume by $28, the option will have a $3 intrinsic value above the remaining extrinsic value.

References for at the Money Option

Academic Research for at The Money Option

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