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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
References in periodicals archive ?
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.
However, this pattern is in stark contrast to that for ATM and OTM options. For ATM options there is a pattern of returns increasing in the time-to-maturity, although the pattern is not monotonic.
Specifically, 120-day out-the-money options, and 200-day ATM and OTM options exhibit strong positive returns.
Additionally, this allows testing separately the information contained in ITM, ATM and OTM options.
The implied volatility of OTM options contained information about realized volatility, both in level and in log, and was efficient and less biased than the implied volatility of ATM options.
In this study, we defined an ATM option as one whose strike price is nearest the price of the underlying asset, and the ITM and OTM options, respectively, as the options whose strike prices are below and above the ATM.
However, the BS model performs no worse than the SV model in hedging long-term OTM options. The probability of the underlying spot rate hitting the barrier is small for the short-term and medium-term barrier options considered in our example, but it becomes relatively large when the maturity of the barrier option becomes longer.
Moving across moneyness at a fixed maturity, it is noted that ITM options are easier to hedge than OTM options in terms of both dollar errors and MADs.
(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.
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.