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'.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Rightmove: Asking prices edge closer to record peak
Asking prices have been driven up by the top-end of the market, Rightmove has found. But how does the situation look in your area?
By Vaishali Varu Published
-
Coventry Building Society bids £780m for Co-operative Bank - what could it mean for customers?
Coventry Building Society has put in an offer of £780 million to buy Co-operative Bank. When will the potential deal happen and what could it mean for customers?
By Vaishali Varu Published