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Out of the money

An option that has no Intrinsic value. A call option is out of the money if the stock price is lower than the strike price. A put option is out of the money if the stock is higher than the strike price of the option.

Exercising a Call option that is Under water would cause the option holder to pay a higher price for shares of stock than the current market price. Similarly, exercising a Put option that is under water would cause the option holder to sell shares of stock at a lower price than the current market price.

Despite this, options that are under water have value. In the case of call options, there is a possibility that, in the time before Expiration date, the stock price will rise so that the call options are In the money. Likewise, in the case of put options, there is a possibility that the stock price will fall so that the put options are in the money.

The Black-Scholes value approximates the fair value of a tradable call option, even one that is under water. A calculation of the current Black-Scholes value of a call option with a given strike and time to expiration is available on the page: Should I exercise my stock options?

Also see Moneyness and Under water.

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Steven Huddart
Smeal College of Business, Penn State University, University Park, PA 16802-3603 USA
(814) 865-3271
(814) 863-8393 fax
huddart@psu.edu
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was last updated on Wed, Oct 7, 2009.
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