Understanding Out Of The Money Options
out of the money refers to an option that will not produce a profit if it is exercised. bob buys a call option on ed's carpets with a strike price of $5. this gives bob the right to buy ed's stock for $5 on or before specified date. ed's is currently trading at $3, so the option is out of the money, meaning there is no profit if bob exercises the option. in fact, bob wouldn't exercise the option, because he can buy the stock for $3 in the market. likewise, if bob has a put option with a strike price of $2 and ed's is trading at $3, the put option is out of the money. bob won't sell his stock for $2, as his option contract states he can, when he can sell it for more in the market. out of the money options can be used to bet on a stock's future movement. this is why investors buy out of the money options when they expect a large move in a stock's price. these options are usually much cheaper than in the money options. when an option is out of the money, it simply means that if you exercise the option right now, you will be out of money. in other words, you will lose money on the transaction.