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.

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'.

Recommended

Resource curse
Glossary

Resource curse

The term “resource curse” refers to the observation that countries with abundant natural resources also tend to be less economically developed than th…
14 Jan 2021
Balance of payments
Glossary

Balance of payments

The balance of payments refers to the accounts that sum up a country's financial position relative to other countries.
8 Jan 2021
Yield-curve control
Glossary

Yield-curve control

Yield-curve control is when a central bank aims to control long-term interest rates by pledging to buy (or sell) as many long-term bonds as needed to …
25 Dec 2020
Intangible assets
Glossary

Intangible assets

An intangible asset is anything that a company owns that isn’t physical.
25 Sep 2020

Most Popular

Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021
Bitcoin: fool’s gold or the new gold?
Bitcoin

Bitcoin: fool’s gold or the new gold?

With bitcoin hitting new highs last week, and close to becoming a mainstream investment, is it really gold for the 21st century?
15 Jan 2021
It's not just the UK – we're seeing pandemic housing booms across the globe
Property

It's not just the UK – we're seeing pandemic housing booms across the globe

Soaring house prices aren’t just a UK thing, they’re a worldwide phenomenon. And it’s no coincidence – the underlying cause is much the same. John Ste…
18 Jan 2021