Basic Points

• When an option is at the money, the price that the option is betting on is the same as the underlying price.  
• Depending on which side of the price the option lands on when it expires, this is the difference of ending up either with some value or no value at all. 
• If the price begins moving so that it is on track to end up with zero value, then it has drifted from at-the-money to out-of-the-money. 

Intermediate: Delta and Assignment

When an option is at-the-money, its delta is about 50. This means that when the price moves around, that the profits/losses would be the same as about 50 shares of that underlying stock (or contract). If an option is out-of-the-money, then delta might only be about 30, which means that profits and losses are only like having about 30 shares. But if an option is further in-the-money, then delta might be 70, which means that this condition is the most similar to trading the underlying stock directly, with profits/losses similar to holding 70 shares. This shift in deltas from assignment can be a very costly difference for option writers (those shorting an option) because it causes a jump in delta, which means a sudden spike in directional risk. This is why ATM options can be both explosive and dangerous when shorter in duration. 

Advanced: Discussion on Extrinsic Value

As Sheldon Natenberg explains in Options Pricing and Volatility, near the money is where extrinsic value is the highest because this is where gamma, theta, and vega are the strongest (2015, p. 149). With extrinsic value being closely linked to vega and implied volatility, the implications of extrinsic value being the strongest near the money is that, “in total points, a change in [implied] volatility will have a greater effect on an at-the-money option than on an equivalent in-the-money or out-of-the-money option” (2015, p. 92). 

However, since OTM options are made entirely of extrinsic value rather than a blend (like with ATM options) then changes in IV will cause the strongest percentage changes for OTM options. And since these point changes in IV are the strongest ATM, and option traders love trading volatility for its bidirectional versatility, ATM options tend to be the most frequently traded.

Expert: Exceptions to the Dynamic

As a twist with gamma’s dynamic, since theoretical models measure change in percentage terms, “the gamma of an at-the-money option declines at higher exercise prices” (2015, p. 149). Gamma is the change in delta per a one-point percentage change in the underlying price, and so if the underlying is twice as expensive, then the percentage change would be half as much compared to how many points change in dollar terms. 

As another visible dynamic, due to the lognormal effect (which prices-in how the underlying can only fall to zero but theoretically can rise forever), puts near the money are supposed to have slightly lower deltas by default, and calls near the money should have higher deltas than puts near the money. However, real world supply/demand can become imbalanced enough to make this default scenario become inverted.