This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
At-the-money (ATM) options are options whose strike price is closest to the current price of the underlying stock. The ATM call has a strike just above the current price, and the ATM put has a strike just below the current price. The ATM options are the most actively traded options, and the ATM options have the highest liquidity and the tightest spreads. The trader who can identify the ATM options can build more accurate trades, and the trader can use the ATM options as a reference for the chain.
What at-the-money means
The phrase "at-the-money" describes the relationship between the strike price and the underlying price. A call option is at-the-money when the strike equals the underlying price, and a put option is at-the-money when the strike equals the underlying price. The option is "at" the money, and the option has no intrinsic value.
An option can also be "in-the-money" or "out-of-the-money." A call is in-the-money when the strike is below the underlying price, and a call is out-of-the-money when the strike is above the underlying price. A put is in-the-money when the strike is above the underlying price, and a put is out-of-the-money when the strike is below the underlying price.
The ATM options are the boundary between the in-the-money and the out-of-the-money options. The ATM options are the most sensitive to changes in the underlying price, and the ATM options have the highest delta, the highest gamma, and the highest theta. The trader who understands the greeks can use the ATM options to build trades that benefit from a move in the underlying price.
How to identify the ATM options
The first step is to look at the option chain. The option chain lists all the available strikes for a given expiry, and the chain is sorted by strike. The trader looks for the strike that is closest to the current price of the underlying stock, and the trader marks the strike as the ATM strike.
The second step is to check the bid and ask prices. The ATM options have the tightest bid-ask spread, and the spread narrows as the option gets closer to the underlying price. The trader who sees a wider spread should avoid the option, and the trader who sees a tight spread can use the option with confidence.
The third step is to look at the volume and the open interest. The ATM options have the highest volume and the highest open interest, and the high volume is a sign of the trader interest. The trader who sees a low volume should avoid the option, and the trader who sees a high volume can use the option with confidence.
The fourth step is to look at the implied volatility. The ATM options have the highest implied volatility, and the volatility is the market's expectation of the future move. The trader who sees a high implied volatility can use the option to bet on a big move, and the trader who sees a low implied volatility can use the option to bet on a small move.
Why the ATM options matter
The first reason is the liquidity. The ATM options have the highest volume and the tightest spreads, and the trader can enter and exit the trade at a fair price. The trader who uses less liquid options pays a wider spread, and the trader gives up part of the profit to the market maker.
The second reason is the gamma. The ATM options have the highest gamma, and the gamma is the rate of change of the delta. The high gamma means the delta changes quickly, and the trader can adjust the position quickly. The trader who wants to be long volatility can use the ATM options, and the trader who wants to be short volatility can sell the ATM options.
The third reason is the theta. The ATM options have the highest theta, and the theta is the daily decay of the option's value. The high theta means the option loses value quickly, and the trader who buys the option pays a high premium for the time. The trader who sells the option collects a high premium, and the trader who sells the option benefits from the time decay.
The fourth reason is the reference point. The ATM options are the reference point for the option chain, and the trader can compare the other strikes to the ATM strike. The trader can calculate the moneyness, and the trader can use the moneyness to compare the premiums.
Common mistakes when identifying the ATM options
The first mistake is to use the wrong strike. The trader who uses a strike that is far from the underlying price is not trading an ATM option, and the trader is trading an OTM option. The OTM option has a lower premium, and the OTM option has a lower probability of profit.
The second mistake is to ignore the bid-ask spread. The trader who enters an ATM option with a wide spread is paying a hidden cost, and the trader should look for a tighter spread. The tight spread is a sign of the liquidity, and the tight spread is a sign of the trader's interest.
The third mistake is to confuse ATM with at-the-money-open. The at-the-money-open is the strike that was at-the-money at the open, and the at-the-money-open may not be the current ATM strike. The trader who uses the at-the-money-open is using a stale reference, and the trader should use the current ATM strike.
Common questions about ATM options
How often does the ATM strike change? The ATM strike changes whenever the underlying price crosses a strike. The trader who holds a position should monitor the underlying price, and the trader should adjust the position when the ATM strike changes.
Can I have an ATM option with a fractional strike? Some brokers offer fractional strikes, and the fractional strikes allow the trader to get closer to the underlying price. The fractional strikes are useful for high-priced stocks, and the fractional strikes are useful for traders who want a precise strike.
What is the difference between ATM and ATM-forward? The ATM-forward is the strike that is at-the-money for the forward price, and the ATM-forward is used in the volatility surface.
Related resources
Where to start
If you are evaluating ATM options, the most useful first step is to open a demo account at a broker that offers options, and to look at the option chain for a stock you follow. Our broker comparison lists the brokers that offer options and the available chains, which together tell you what the broker offers before you place the first options trade.