At the money (ATM) - When the strike price of an option matches the market price of the underlying security, this is known as being at the money (ATM). The delta of an ATM option is 0.50, which is positive for calls and negative for puts. ATM allows for the simultaneous use of call and put options. For instance, if the price of the XYZ stock is $30, both the XYZ 30 call option and the XYZ 30 put option are ATM. In contrast to in the money (ITM) and out of the money (OTM) options, ATM options have no intrinsic value but will still have extrinsic value or time value before expiration.
In-The-Money Option Value
There are two components to an option's overall value, generally known as the option price: the intrinsic value and the time value. If an option is immediately exercised at the strike price, then the option's intrinsic value is equal to the difference between the strike price and the price of the underlying asset.
For example, let's say that both call option and put option have the identical strike price of $25, even though the current (spot) price of the underlying asset is $30. Since the call option grants the holder the right to purchase an item with a $30 value for just $25, it has an intrinsic value of $5. Since the put option will never be executed and provide no income, it is worthless.
If you take the intrinsic value of an option and remove it from the total value, you get the time value of the choice. The more distant is the expiration date, the greater is time value. Time value decreases as the expiration date moves closer.
Time Value = Total Value – Intrinsic Value
When an option is at the money, it has no underlying value. Because the option's strike price and the market price of the underlying asset are the same, the option's holder would lose money if they exercised it, making the option worthless. Its only value is time.
At the Money and Other Variations on the Theme
Out of the money (OTM) and in the money (ITM) are two more concepts related to pricing options. An option is considered "in the money" (ITM) when both its intrinsic value and time value are positive. When an option is out of the money (OTM), the investor stands to lose money if they choose to exercise it.
Traders who own call options will want to exercise them when the current market price of the underlying asset is greater than the option's strike price.
Call options are considered to be "in the money" when the price is higher than the strike price and "out of the money" when the spot price is lower. If the price of the underline asset is lower that the strike price, investors have no incentive to exercise it as the call option has no intrinsic value.
In contrast, investors profit when they sell an asset for more than it is currently worth by exercising put options when the market price is lower than the strike price. In that case , the options are profitable. Investors have no incentive to exercise when the underline asset price is higher than the strike price, hence there is no intrinsic value. In that instance Right now, the options are worthless.
At the Money for both Calls and Puts
It is possible for a put option and a call option with the same underlying asset and strike price to both be at the money at the same time, but it is impossible for them to both be in the money and out of the money. Both the call option and put option are "at the money" only if the striking price of the option is equal to the current market price of the underlying asset. Using our previous example, if the strike price of both call and put option are $25, and the underlying asset is trading at $25, we can say that both call and put options are "in the money".
The intrinsic value of a call option is equal to the difference between the spot price and the strike price if the security's price rises, while the value of a put option falls to zero. In the event of a price decline, a call option would be considered "out of the money," while a put option would be "in the money," with an intrinsic value equal to the difference between the strike price and the current price.