Underwater

underwater

Of or relating to a stock option for which the option exercise price is higher than the market price of the stock.

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Underwater

1. Describing an out-of-the-money stock option. That is, it describes an option in which the underlying asset is a stock that is currently trading for less than the strike price of the option. For example, an executive at a publicly-traded company may have stock options in which he may buy the stock of his/her own company for $80 per share. If the stock is currently trading at $60 per share, the options are worthless.

2. Insolvent; unable to meet a financial obligation. The term especially applies to being unable to meet a margin call.

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Underwater. You're underwater when your employee stock options are out-of-the-money and so currently worthless.

For example, if you have options to buy your company stock at a strike price of $50, and the stock is currently trading at $30, you're $20 underwater on each option. You can see how the next step may be drowning -- financially speaking, of course.

The term underwater is also used to describe situations where the principals are unable to meet their financial obligations.

For example, if an investor is unable to meet margin calls on a margin account that has lost a considerable amount of money, the account is said to be underwater. Similarly a firm that is having financial difficulty is described as underwater.