Article

Out-of-the-money Option
June 07 , 2012

This needs understanding of options and concept of strike price of an option. If the strike price is such, that the option looks very unlikely to be useful, the option is said to be out-of-the-money. The option will become useful only if there is a drastic change in the price of the underlying. Thus, in case of call option, it is out-of-the-money if strike price is much higher than current price. In case of put option, it is out-of-the-money if strike price is much lower than current price.

For instance, say the prevailing price of an Infosys share is Rs. 2000. If I take an option to buy Infosys share at Rs. 3000 three months from today, it is an out-of-the-money option (in this case call option). After all, unless Infosys share prices rises sharply in the interim, this option is likely to be worthless. Obviously, such an option is likely to be much cheaper than if the strike price is closer to current price or below it.

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