An option is "at-the-money" when its strike price is exactly at or very near the current market price of the underlying stock. ATM options have no intrinsic value — their entire premium is extrinsic value. However, ATM options have the highest extrinsic value of any strike for a given expiration.
ATM Options and Theta: Because ATM options have the most extrinsic value, they also experience the fastest dollar-amount of Theta decay. A $0.50 ATM option decays faster in absolute dollar terms than a $0.15 OTM option at the same expiration.
ATM Options for the Wheel: Wheel traders rarely sell ATM options because the assignment probability is roughly 50%. The goal is to collect premium while keeping the stock from reaching the strike. Selling ATM gives too high a chance of assignment or being called away immediately.
Examples of At-the-Money (ATM) in Action
- 1A $100 put sold when the stock is at $100.15 — approximately ATM.
- 2ATM straddles (selling both ATM call and put) are used by volatility sellers but are outside the standard wheel strategy.
- 3An ATM put with a 0.50 delta — there is roughly a 50/50 chance of assignment.