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Published On: Sat, Feb 16th, 2013

Out of the Money

The term Out of the Money refers to when an option’s strike price is either well above or well below the price of the underlying security that it is tied.

The strike price or exercise price of an option is the price that the holder of the option can buy the security (in the case of a call option) or sell the security (in the price of a put option.)  If the strike price of a call option is higher than the market price of the underlying security, the option is considered to be Out of the Money, and the option has no intrinsic value other than time value.  If the strike price of a put option is lower than the market price of the underlying the put option will be Out of the Money and will only have time value to the options contract.  This time value erodes quickly, until the Out of the Money contract reaches the expiration date, when the contract will expire worthless.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

 

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