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What Does "out of the Money" Mean?

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  • Written By: Mary McMahon
  • Edited By: Nancy Fann-Im
  • Last Modified Date: 03 December 2016
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In options trading, an option is out of the money when it has no financial value, making it worthless to the person who holds it because of a shift in market movements. Exercising the option would result in a loss, and the holder may simply allow it to expire without taking any action. This state is the opposite of being in the money, where the contract has value, making it appealing to exercise. Options traders use a variety of techniques to avoid situations where their options lose value and end up out of the money.

In the case of a call option, the holder of the option has the right to buy a given commodity at a set price. When the exercise price, or the price set in the option, is above the current market price, the option is out of the money; the investor holding the option could simply buy the commodity on the open market at a lower price. The goal with such options is to lock in a lower price to make a profit by buying and then reselling, and when they finish out of the money, this is no longer possible.

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Put options provide the right to sell a commodity at a set price when the option matures. When this price is lower than the current market value, the option is out of the money, as there is no reason to exercise a right to sell at a price lower than the current market price. The investor would be better served by selling the subject of the contract on the open market to get the best possible price.

Options traders consider market conditions, historic trends, and other factors carefully before entering into a contract. Holding an out of the money contract is not a desirable state of affairs, but it can happen to any investor, even one with extensive experience. Sometimes markets move unpredictably, or an options trader makes a gamble that does not pay out, such as strongly believing that a company's stock has an upward or downward trend when it does not.

It is possible to trade options just as it is to trade commodities directly. An options trader who fears that a contract may end up out of the money could try to unload it on another trader, if possible. This can be difficult, as other investors will conduct their own investigations into the contract and may conclude that it is a poor value.

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