When the stock price is the same as the strike price an option is considered at the money. The option has no intrinsic value and the price is entirely composed of time premium. Consequently, the time premium component is at its highest level when options are at the money. A $50 call on a $50 stock is an at the money example. If the option trades for two dollars, the price is all time premium. As the stock rises, the option will pick up intrinsic value. At the money options move with the underlying stock at a slower pace than in the money options. The relative change in the price of the option is known as its Delta. At the money options are very liquid and they attract the greatest amount of volume. This liquidity normally translates into tighter bid/ask spreads and slippage getting in and out of the position is reduced. A $50 put on a $50 stock is considered to be at the money. As the stock declines below $50, the put option will start to pick up intrinsic value.
At the Money
November 11, 2008