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

  • The pricing of options on assets with stochastic volatilities, Hull, J., & White, A. (1987). The journal of finance, 42(2), 281-300. This paper examines the problem of the pricing of a European call an asset having stochastic volatility.
  • Option pricing when the variance changes randomly: Theory, estimation, and an application, Scott, L. O. (1987). Journal of Financial and Quantitative analysis, 22(4), 419-438. This paper focuses on examining the European call options on stocks that posses randomly changing variance rates. It studies time diffusion processes that are continuous and necessary for stocks return and standard deviation parameter to determine if one should use the stock and two options when forming a riskless hedge.
  • An empirical examination of the Black‐Scholes call option pricing model, MacBeth, J. D., & Merville, L. J. (1979). The Journal of Finance, 34(5), 1173-1186. This paper performs a deep dive into the Black‐Scholes call option pricing model and studies how the model works and its advantages as well as disadvantages.
  • Option pricing when the variance is changing, Johnson, H., & Shanno, D. (1987). Journal of Financial and Quantitative Analysis, 22(2), 143-151. This article uses the Monte Carlo method to solve for the price of a call when the variance is changing stochastically.
  • The effect of executive stock option plans on stockholders and bondholders, DeFusco, R. A., Johnson, R. R., & Zorn, T. S. (1990). The Journal of Finance, 45(2), 617-627. This paper uses evidence collected from traded call options and stock return data to prove that executive stock option plans contain asymmetric payoffs that encourage managers to take on more risk.
  • Further results on the constant elasticity of variance call option pricing model, Emanuel, D. C., & MacBeth, J. D. (1982). Journal of Financial and Quantitative Analysis, 17(4), 533-554. This paper finds out that while the Black-Scholes model keeps assuming that the instantaneous variance of return is constant through time, the other members belonging to the class allow for the volatility to change with the stock price.
  • Stock market volatility and the information content of stock index options, Day, T. E., & Lewis, C. M. (1992). Journal of Econometrics, 52(1-2), 267-287. This paper attempts to compare the information contained in the implied volatilities from call options on the S&P 100 index to GARCH and exponential GARCH models of conditional volatility.
  • The nature of option interactions and the valuation of investments with multiple real options, Trigeorgis, L. (1993). Journal of Financial and Quantitative Analysis, 28(1), 1-20. This paper deals with how options interact and also the valuing of capital budgeting projects that have flexibility in the form of multiple real options. It looks for situations where option interactions can be either small or large and negative or positive.
  • Recovering probability distributions from option prices, Jackwerth, J. C., & Rubinstein, M. (1996). The Journal of Finance, 51(5), 1611-1631. This article creates underlying asset risk-neutral probability distributions of various European options on the S&P 500 index.
  • Option values under stochastic volatility: Theory and empirical estimates, Wiggins, J. B. (1987). Journal of financial economics, 19(2), 351-372. This paper finds a solution to the problem of valuing a call option when provided with a relatively general stochastic process for return volatility that is continuous.
  • Approximate option valuation for arbitrary stochastic processes, Jarrow, R., & Rudd, A. (1982). Journal of Financial Economics, 10(3), 347-369. This study shows how to approximate a given probability distribution by an arbitrary distribution in terms of series expansion that involves second and higher moments.

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