Also found in: Acronyms.
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.
An option is out-of-the-money when the market price of an instrument on which you hold an option is not close to the strike price.
Call options -- which you buy when you think the price is going up -- are out-of-the-money when the market price is below the strike price.
Put options -- which you buy when you think the price of the underlying instrument is going down -- are out-of-the-money when the market price is higher than the strike price.
For example, a call option on a stock with a strike price of 50 would be out-of-the-money if the current market price of the stock were $40.
And a put option at 50 on the same stock would be out-of-the-money if its market price were $60. When an option expires out-of-the-money, it has no value.