At-the-money (ATM) options

At-the-money (ATM) options are options where the strike price is exactly at the current price of the underlying. In this guest article, Alexander Eichhorn explains why these options are so special and how option writers can use this as a major advantage.

What are at-the-money options?

At-the-money (ATM) options are options where the strike price corresponds to the current market price of the underlying asset. The strike price is exactly "at the money". In the case of share options, this means that the strike price corresponds to the current share price. For example, a 100 call/put option would be exactly "at the money" if the price of the respective share is also currently at $ 100.

Intrinsic value of ATM options

The intrinsic value of an option is the amount that can be realized immediately by the buyer of the option upon exercise. The Intrinsic value of an option is calculated as follows:

Calculation: price of the underlying - strike price (call option)

Calculation: Strike price - price of the underlying (put option)

A negative result becomes zero, as the buyer is not obliged to exercise the option. In addition to the intrinsic value of an option, there is also the concept of the so-called "Moneyness" of an option. Moneyness expresses whether and how much intrinsic value an option has:

ITM (In the Money)

An option is in the money (ITM) if it has an intrinsic value

OTM (Out of the Money)

An option is out of the money (OTM) if it has no intrinsic value

ATM (At the Money)

An option is at the money (ATM) when the strike price corresponds to the current price of the underlying asset

Advantages of at-the-money options

The sale of ATM options is particularly suitable for trading cash-secured puts, as investors can generate a very high return here. To understand the advantages of the "at the money" options, we need to understand the Option Greeks view.

The Vega

The first advantage of ATM options is the vega. If writers take advantage of phases of high implied volatilitythen they benefit greatly from the flattening of implied volatility. The vega of an option reflects the rate of change in the option price as a function of volatility.

Increase in volatility -> option becomes more expensive
Decrease in volatility -> option becomes cheaper

And now to the advantage of ATM options, because this is where the vega is greatest:

The advantage of writers who sell an ATM option at the highest volatility point is that no other option loses as much in value (only in terms of vega) as these ATM options. The downside is that if volatility continues to rise, these options will rise in price the most.

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More return! Wheel strategy with ATM options

The theta

Theta indicates the rate of change of the option price per day. Theta is also better known as time value decay. Here too, the Greek is the largest for ATM options:

Since the theta is always negative (time cannot be reversed), the writer always has the advantage over the buyer of the option.

Note:

ATM options are options where the price of the underlying corresponds exactly to the current price of the strike price
ATM options have a delta of exactly 50
ATM options have the greatest influence of volatility (Vega)
ATM options have the largest time value decay (theta)

Conclusion on the advantages of ATM options

Options that are quoted at the money have two major advantages. Firstly, the vega is the largest. If options traders sell options in a high volatility environment, ATM options benefit greatly from a drop in volatility. Secondly, the theta (time value loss) gnaws very strongly at the options sold, which in turn is always an advantage for writers.

Where there are advantages, there are of course also disadvantages: If an ATM option is sold too early and volatility rises even further, the option increases in value very quickly. If the price of the underlying also moves against my option, the ATM option very quickly runs into the money and the delta increases further.

We use ATM options when we see a very big opportunity in the markets and like to sell Cash Secured Puts at the money on strong down days to generate an extremely high premium income.

FAQ - Frequently asked questions about At-the-Money (ATM) options

What are At-the-Money (ATM) options?

At-the-money (ATM) options are options whose strike price corresponds to the current market price of the underlying asset. For share options, this means that the strike price corresponds exactly to the current share price.

How is the intrinsic value of ATM options calculated?

The intrinsic value of an option is the amount that can be realized immediately upon exercise. For call options, the intrinsic value is calculated from the price of the underlying minus the strike price. The reverse is true for put options. For ATM options, the intrinsic value is zero, as the strike price corresponds to the current price.

What are the advantages of ATM options for option writers?

ATM options offer two main advantages:

Vega: The option price of ATM options is very sensitive to changes in implied volatility. In times of high volatility, option writers can profit when volatility decreases again.
Theta: The time value decay (theta) is greatest for ATM options. This steady decay of the time value benefits writers, as the value of the options sold decreases over time.

Why do ATM options have a delta of 50?

The delta of an option indicates how the price of the option changes in relation to the price movement of the underlying. ATM options have a delta of around 50 because the probability of the option ending in the money is roughly the same as the probability of it ending out of the money. A price movement of the underlying by one dollar therefore leads to an expected price change of the option of around 50 cents.

When should ATM options be used?

ATM options are particularly suitable for writers in times of high implied volatility or when a very high premium income is to be achieved. They are an attractive option for selling cash-secured puts on strong down days in order to benefit from the high premium income.

What is the wheel strategy and how do ATM options fit in?

The wheel strategy is an options strategy that aims to generate continuous income through the repeated sale of covered calls and cash secured puts. ATM options fit well with this strategy as they can be used during periods of high volatility or sharp market movements to generate a higher premium income. In the long term, this strategy can be very successful, especially with stable and growing companies, but requires in-depth knowledge of options trading.

Are there any disadvantages to using ATM options?

Yes, the main disadvantage of ATM options is the risk of rising volatility after the option is sold. If volatility continues to rise, the value of the option can increase rapidly, which is disadvantageous for the writer. In addition, a movement in the price of the underlying against the position can lead to the option quickly running into the money and the delta increasing, which increases the risk.

Alexander Eichhorn

Alexander Eichhorn is the founder of Eichhorn Coaching and full-time trader and investor. His educational activities focus on providing optimal support for clients with large accounts. He also shows options traders how to get started quickly with profitable options trading through numerous blog articles and regularly publishes analyses and tips on the Eichhorn Coaching YouTube channel and in his monthly webinar series at CapTrader.

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More returns through the sale of at-the-money (ATM) options!