At-the-money (ATM) is the best spot for winning trades in options. You must understand the ATM to make money. It is the only way to win.
At-the-money means an option’s strike price is the same as the stock’s current price. This gives the option no real value (this is called intrinsic value). But it has a lot of time value. The best trading plans use ATM options.
The rule is simple. If Nifty is at 25,000, a 25,000 strike is the perfect ATM option. In real trading, prices are not exact. You must look at strikes that are close, like 50-100 points away. This is how you must trade.
Table of Contents
Understanding At-the-Money Options
At-the-Money Definition in Options Trading
ATM options have a delta of ±0.50. This is a rule. When a stock moves one point, the option’s price changes by 0.50 points. This makes ATM options change fast with the stock price. And they do not cost too much.
Right now, Nifty is at 24,992. So, the 25,000 strike options are the true ATM options. Everyone trades these. They have the most volume and the smallest price gaps. This shows that all smart traders use them.
How At-the-Money Options Work
ATM options are only made of time value. The price you pay is just for its time value. This is called extrinsic value. ITM (In-the-Money) options are different because they have real value.
ATM options get their value from two things. One is the time left before the option ends. The other is how much people think the price will move (this is called implied volatility).
Strike Price vs Market Price Relationship
The price of the stock and the strike price of the option tell you if it is ATM, ITM, or OTM. Here are the facts:
- ATM: Strike price = Market price.
- ITM Call: Strike price is LESS THAN the Market price.
- OTM Call: Strike price is MORE THAN the Market price.
Bank Nifty is now at 54,775. So, the 54,800 and 54,750 strikes are the ATM options you should watch.
Intrinsic and Extrinsic Value Breakdown
The price of an ATM option is very simple:
- Intrinsic Value: It has zero real value.
- Extrinsic Value: The whole price is made of time value and volatility value.
- Total Premium: The price is only time value, and it goes away fast. This is called theta decay.
Types and Characteristics of ATM Options
At-the-Money Call Options Explained
An ATM call option gives you the right to buy a stock at a set price. A 25,000 Nifty call costs about ₹111. This price is only for time value. The price gets smaller every day.
ATM Call Option Scenarios
Let’s say you buy a Nifty 25,000 call for ₹111. Here is what can happen:
- Breakeven Point: 25,111 (Strike Price + Premium). The price must go above this for you to make money.
- Maximum Loss: ₹111 for each contract. This happens if Nifty closes below 25,000.
- Unlimited Profit Potential: Your profit has no limit after the price passes the breakeven point.
Profit and Loss Potential
To make money, the stock must go up. It must go up more than the price you paid for the option. These options have a lot of time value. You need the stock to move up fast and by a lot to make money.
At-the-Money Put Options Explained
ATM put options protect your money if the market goes down. They also let you bet that the market will drop. The 25,000 put option costs ₹114. It has a time value like the call option.
ATM Put Option Scenarios
If you buy a 25,000 put for ₹114, here is what can happen:
- Breakeven Point: 24,886 (Strike Price – Premium).
- Maximum Loss: ₹114 for each contract.
- Maximum Profit: The strike price minus the premium. This happens if the stock price falls to zero.
Risk-Reward Profile
ATM puts are a good deal. Your risk is small, but your profit can be big. If the market goes down, you can make a lot of money. But time works against you. You must have perfect timing.
ATM vs ITM vs OTM Options Comparison
Key Differences in Moneyness
These options are different in important ways:
| Option Type | Intrinsic Value | Time Value | Delta Range | Risk Profile |
|---|---|---|---|---|
| ITM | It has this | Some | 0.60-0.90 | Less risk, costs more |
| ATM | None | The most | ~0.50 | Good balance of risk and reward |
| OTM | None | Less | 0.10-0.40 | More risk, costs less |
Trading Cost Comparison
Here are the costs for Nifty options right now:
- ITM (24,900 Call): ₹171.90 premium
- ATM (25,000 Call): ₹111.20 premium
- OTM (25,100 Call): ₹61.90 premium
The prices are different. ITM options cost more because they have real value. ATM and OTM options cost less because their price is only time value.
ATM Options Pricing and Trading Factors
What Affects At-the-Money Option Prices?
Many things change the price of ATM options. You must watch all of them:
- How much the stock price moves up and down (volatility)
- Time left until the option ends
- Changes in expected volatility (implied volatility)
- Changes in interest rates
- News about company payments (dividends)
Time Decay Impact on ATM Options
ATM options lose value very fast because of time. This is called time decay. This happens because ATM options have the most time value. They have no real value to protect them.
ATM options lose 1-3% of their value every day in the last month. In the final week, the value drops even faster.
Volatility and ATM Option Premiums
How much a stock price might move (volatility) is very important for ATM prices. When the market is moving a lot, buying both an ATM call and a put (a straddle) is a good idea. It is the best way to make money from big price moves, no matter which way the price goes.
When to Trade At-the-Money Options?
Market Conditions for ATM Trading
You must trade ATM options only at these times:
- When volatility is high.
- Before big news, like company earnings reports.
- When a stock price is breaking out on the charts.
- On special days, like Budget Day.
Common ATM Trading Strategies
These are the best ATM plans. All good traders use them:
- Short Straddles: Sell an ATM call and a put to get the premium money.
- Long Straddles: Buy an ATM call and a put to bet on big price moves.
- Iron Butterflies: Mix a short straddle with other options to protect your trade.
- ATM Covered Calls: Sell ATM calls on stocks you already own to make extra money.
FAQ
How do you identify At-the-Money options?
Look at the stock’s price. Find the strike price that is closest to it. That is the ATM option.
What happens when ATM options expire?
ATM options lose all their value if the stock’s price is exactly at the strike price when it ends. They will have a very small value if the stock price is just a little bit above the strike (for calls) or just a little bit below (for puts).
Are At-the-Money options good for beginners?
Yes. ATM options have a good balance of risk and reward. They are great for beginners. But their value disappears fast. You must have a clear plan to sell, or you will lose all your money.
Why do ATM options have higher time decay?
ATM options lose value the fastest because their price is 100% time value. They have no real value to protect the price. This makes their value drop very fast over time.
Can you make money with At-the-Money options?
Yes, you will make money with ATM options. You can trade based on the market’s direction or on big price moves. To win, you must understand time decay and volatility. Your timing must be perfect.
