What is out of the money?
A term applied to an option which is yet to reach its strike price. Since an investor would make a loss if the option was exercised, they're said to be 'out of the money'. For example: an option has the strike price of £5, but the trade value is £3, the investor is considered to be 'out of the money' by £2 as they are making a loss.
Where have you heard about out of the money?
The term can be used by investors to describe options that have some way to go before meeting their strike price. It's the opposite of being 'in the money', when an option has gone beyond its strike price and can be exercised to make a profit.
What you need to know about being out of the money.
The term specifically refers to call and put options.
A call option gives an investor the opportunity to purchase an underlying asset at a particular price (the strike price) before a specific date. In contrast, a put option allows an investor to sell an asset at a pre-agreed price and by a set deadline.
This means a call option is out of the money when the strike price is higher than the current market price of the asset. A put option is out of the money when the strike price is lower than the market price.
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