Out-of-the-Money
IntermediateAn option is out of the money when exercising it immediately would not be profitable: for a call, when the underlying price is below the strike price; for a put, when it is above.
Out-of-the-money options have no intrinsic value. Their entire price is time value, reflecting the chance that the underlying asset will move enough before expiry to make them profitable.
For example, if a share trades at 40, a call option with a strike price of 45 is out of the money by 5. A put option with a strike price of 35 is also out of the money by 5.
Out-of-the-money options are cheaper than in-the-money options. This makes them attractive to speculators, because a small investment can produce a large percentage gain if the price moves sharply in the right direction. But they are also more likely to expire worthless, in which case the buyer loses the entire premium.
For instance, a call with a strike of 45 might cost only 0.80 when the share is at 40. If the share rises to 50 by expiry, the option is worth 5, more than six times the premium. If the share stays below 45, the option expires worthless. Out-of-the-money puts are often bought as relatively cheap insurance against a large fall in price.
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