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 ?
6) Note that the delta of an ATM option is always 50% and the delta of a deep OTM option is close to zero, while the delta of a deep in-the-money (ITM) option is close to one.
However, the BS model performs no worse than the SV model in hedging long-term OTM options.
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.
One can also go for the ITM call options, but these are more expensive than the OTM options as their value (premium) includes intrinsic value along with the time factor.
If the OTM option is exercised, it leads to a negative cash flow for the buyer.
Results for Call options show that an increase in options volume results in rise of expected volatility the next day but is significant only for OTM options enforcing volatility information based trading of Nifty call OTM options.
In other words, returns for the OTM options are higher on average than returns for the ITM options.
In Figure 1c, we note that the more the volatility level is weak, the more the difference between ITM and OTM options is high.