Definition of Out of the Money

Out of the Money is a term to describe the relationship of an option’s strike price to the underlying security’s price, when exercising the option would not make economic sense. A call is out of the money when the security’s price is below the option’s strike price. A put is out of the money when the security’s price is above the option’s strike price.

Applying "Out of the Money" to Securities Exams:

When an option is out of the money an investor who is long the option would not exercise the option because the investor would be able to buy or sell the underlying security at better terms in the market place. It is important to remember that the term out of the money is not in anyway referring to the profitability of the position.

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