Out-Of-The-Money
An option is "out-of-the-money" when exercising it would not result in any intrinsic value based on the current relationship between the strike price and the market price (excluding the premium paid and any associated costs).
● A call option is out of the money when the market price is below the strike price.
● A put option is out of the money when the market price is above the strike price.
Out-of-the-money options have no intrinsic value - only time value and implied volatility determine their price.
Why out-of-the-money options matter to investors
Understanding when an option is out of the money can help investors:
● Recognise options that are currently unprofitable to exercise
● Manage risk and avoid unnecessary exercise and understanding potential losses
● Assess how far an option is from profitability
● Build strategies that consider changes in price or volatility and the associated risks
Options are complex financial products that involve significant risk and are not suitable for all investors. Understanding their mechanics, pricing factors, and the potential for loss is essential before considering any trading activity.