Out of the money

If an option is ‘out of the money’ it is usually not worth exercising given the current market price of the underlying asset. That also makes it cheap to buy.

For example, a three-month call option on a share might have a strike price of £2.50. If the actual share trades on the London Stock Exchange at £2.00, the call option is out of the money.Were the holder to exercise it they would lose 50p (buying the share from the option writer for £2.50 and selling it on in the open market for £2), plus any premium they have paid on top.

However, that does not mean the option is worthless.There is always a chance that the underlying share will rise above £2.50 before the option expires, which would put it ‘in the money’.

Merryn

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