options

At the Money Options: Definition and Example

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You may have heard options sometimes referred to as being "at the money". If you're not familiar with the term, then you're in the right place to learn more about it.

For any given set of options, there are often a number of different strike prices available. At the money options refer to a distinct strike price for any series of options. They have unique characteristics that are helpful to be aware of if you're considering investing in options.

 

Meaning of at the Money Options

The formal definition of at the money options is as follows:

That definition holds true for both call options and put options.

This video about at the money options might help improve your understanding:

 

 

Example of at the Money Options

Now that you know the book definition, let's look at an example to make it easier to connect the dots on what at the money options are.

Imagine that you're considering the idea of buying Amazon options, and imagine that Amazon stock is selling for $105.

Now imagine that you're evaluating three call options, as shown in the image below:

 

 

We know that any options where the stock price is equal to the strike price will be at the money.

In the example above, the option in green text is the only option that meets that criteria, as the stock price of $105 is equal to the strike price of $105. The other two options do not meet that criteria and are therefore not in the money.

Options that are not in the money are either out of the money or in the money.

It doesn't matter what expiration date these options have since that doesn't affect whether any given option is at the money.

 

Other Strike Prices That Are Considered at the Money

Many times, the stock price will not be exactly equal to any option's strike price. In those cases, people often refer to the closest strike price as being at the money.

For example, if Amazon's stock was selling for $105.08, then the $105 strike option could still be considered at the money. It could also be considered in the money since it has $0.08 of intrinsic value.

 

Cost of At The Money Options

Option prices are made up of two components: intrinsic value and extrinsic value.

Intrinsic value represents how far in the money the option is. At the money options have no intrinsic value.

Extrinsic value is typically highest in the strike prices that are closest to the stock's price. Therefore at the money options typically have high extrinsic value relative to other strike prices for the same option expiration.

 

Learning More About at the Money Options

If you need more help getting up to speed on at the money options or options in general, take a look at our guide to options trading for beginners.

If you'd rather leave it to the pros but still want good option investment ideas, you can consider signing up for our options alert service.

You can contact us any time if you would like to ask any questions about extrinsic value or about options in general.