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 ?
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.
In Figure 1c, we note that the more the volatility level is weak, the more the difference between ITM and OTM options is high.
If the OTM option is exercised, it leads to a negative cash flow for the buyer.