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2. Insolvent; unable to meet a financial obligation. The term especially applies to being unable to meet a margin call.
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.
A popular expression for a property with a debt larger than its value.You will sometimes encounter prime properties for lease,rather than for sale,because the property is underwater. The owners cannot afford to sell,because a sale at market value would require them to bring cash to the closing table to pay off the debt.