At The Money Option – The Highest Extrinsic Value Option in the Market
An At The Money option is one of the three different states we can find in an option contract attending to the relationship between the underlying and the strike price of an option.
In this guide, we will learn what is At the Money option, and we will answer several questions such as why buy an At The Money option or how to calculate At The Money option price
Table of Contents
Let us begin with the basics…
What is At The Money option?
An At The Money option is one of the three main states we can find an option contract attending the relationship between the strike price and the price of the underlying asset we are dealing with in the option chain.
An At The Money option is also called an ATM option, and they are the options with the highest extrinsic value of the entire market.
The reason is because the entire premium is based on volatility and time compared with the Out of the Money options and with the In The Money options.
What is an At The Money call option then?
We will say we have an At The Money call option when the strike price is near the current underlying price. Let us take a look at the following image to understand this better.
At the money call option example
If we had a company whose share prices were $60, all those strike prices near that underlying price would be called At The Money call option.
There is no agreement about when the option is precisely At The Money, so those strike prices rounding the $60 mark are called At the Money options.
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What is an At The Money put option?
In this case, we will say we have an At The Money put option when the strike prices are approximately near the current underlying price, just as the same we had we the At The Money call option.
An At The Money put option example
If we have a company whose share prices were $60, all those strike prices near that value would be called At The Money put option.
As you can see, it is exactly the same with the At The Money call option
An At The Money example with much more detail
If Beyond Meat was currently trading at $100 per share, those strike prices between $102 and $98 could be considered At the Money call options and At The Money put options.
This is a close approximation because, in reality, we could say that a strike price of $102 in the call option contract would be an Out of the Money contract. We would have the opposite with a put option contract that we could say is In The Money.
Why buy At The Money options?
The reason is it will always be cheaper buying an At The Money put option or call option than buying the stocks in the market. So we could say that we would be buying At The Money options because of the leverage.
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How is an At The Money option priced?
Let’s continue with our example above. Imagine Beyond Meat maintains its share prices at $100 per share. One would expect both call and put premiums to be exactly the same if we set the same expiration date, and we pick the exact same strike price.
As we can see, their prices are not zero but some other value.
If we decide to exercise one of those contracts, we will pay both the premium and the 100 shares, $100 each. However, if we buy them in the stock market, we will be paying less than buying one of those contracts, right? So, where does the At The Money premium value comes from? The answer is from factors such as volatility and the time to expiration.
These are the parameters that create almost the entire extrinsic value of an option, and it happens that the At The Money options are those options with the highest extrinsic value.
How to calculate At The Money option price?
If you need to calculate both At The Money call options and At The Money put options, the best way to do it is with an option trading calculator that emulates the Black Scholes model. If you need one, you can download ours here along with our completely free Options Guide!
