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At the money (ATM) Volatility and ATM Strike in the FX options market
Team Latte
August 6, 2011
At the money (ATM) option is defined as a call or a put option whose strike price is equal to the current spot (asset) price. Such an ATM strike is normally called "100 strike". The current asset price can be normalized to 100 (for quotation or valuation purposes) and the strike price then becomes equal to 100. Therefore, at the money (ATM) volatility of an option is found out by solving for the implied volatility of an ATM option. The volatility that makes the theoretical, Black-Scholes (or any other model dependent) price of an ATM vanilla option equal to the market price of that option is known as the ATM volatility. A dealer will quote the ATM volatility of a 100 strike option to his client. However, this classification is normally done for the equity and rates options markets.
For the foreign exchange (FX) options markets, the meaning of ATM volatility and ATM strike is a bit different. Market quoted ATM volatility for various currency pairs in the FX market is an important number used by FX options traders to hedge and risk manage options portfolios.
In the FX options market ATM volatility is the implied volatility of a zero delta straddle. A straddle is a combination of a vanilla call and a put option with the same strike price and same expiration (time to maturity). A zero delta straddle means that the delta of the straddle is zero, thereby implying that the delta of the call and put are equal and of opposite sign.
Say,  is the ATM implied volatility of the FX pair (say, USD/JPY) and  is the ATM strike of the FX option (USD/JPY option). Then for the FX (USD/JPY) straddle, with the call and the put having the same strike price of , to have zero delta the following equation must be satisfied:
In the above equation, we have just equated the deltas of the call and the put option. The notation  stands for the cumulative Normal distribution function,  is the current spot and  is the standard Black-Scholes notation.
From the above equation, we can find out the ATM strike, , which would be equal to 
Reference: For a good discussion of the above see Options on Foreign Exchange, 3rd edition, David DeRos (John Wiley & Sons, 2011).
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