Out-of-the-Money Option

Posted in Finance, Accounting and Economics Terms, Total Reads: 1491
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Definition: Out-of-the-Money Option

An out of the money option does not have any intrinsic value for the option holder.

For call options, when the option’s strike price is greater than the market value of the underlying asset. In such scenario the call option does not remain beneficial for the option holder.

For put options, when the option’s strike price is less than the market value of the underlying asset.

Call option: Strike Price > Market Price

Put option: Strike Price < Market Price

Example:

For Call option, Firm A which manufactures bread had bought a call option according to which it has the right to buy wheat at price of 50 per kg (Strike Price). After 6 months the market value of wheat is Rs 45 per kg. In this situation it will be beneficial for firm A to buy wheat from market instead of exercising the option. In this case the option becomes an out-of-the money option.

For Put option, Farmer B had bought a sell option to sell wheat at the price of Rs. 45 per kg (Strike Price) after 6 months.  After 6 months the present value of wheat at market is Rs. 50 per kg. It will be beneficial for the farmer to sell wheat at the market instead of exercising the option. In this case the option becomes an out-of-the money option.


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