Out-of-the-money option

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Out-of-the-money option

A call option is "out of the money" if the strike price is greater than the market price of the underlying security. That is, you have the right to purchase a security at a price higher than the market price, which is not valuable. A put option is out of the money if the strike price is lower than the market price of the underlying security.

Out-of-the-Money Option

1. A call option with a strike price more than the value of the underlying asset.

2. A put option with a strike price less than the value of the underlying asset.

In both these situations, the option contract has no intrinsic value. If an option is deep out of the money, it is unlikely that the option will be in-the money by the expiration date. If possible, out-of-the-money options are sold; if not, they expire worthless and the option holder loses the premium.
References in periodicals archive ?
The price of an ITM option ( Rs 150) is higher than the price of an OTM option ( Rs 95).
This is because the ITM options are costlier than the OTM options due to intrinsic value along with time value.
It should ideally be an OTM option, where the strike price is higher than the market price of the underlying stock.
This is because the value of the OTM option derives only from the time factor, that is, expectations that the underlying price will rise beyond the strike price over time.
If the OTM option is exercised, it leads to a negative cash flow for the buyer.
In Figure 1c, we note that the more the volatility level is weak, the more the difference between ITM and OTM options is high.