Out of the money definition

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Out of the money is one of three terms used in options trading, referring to an underlying asset’s price in relation to the price at which it can be bought or sold (its strike price).

As well as being out of the money, an option can be in the money or at the money. Together, these terms are known as an option’s ‘moneyness’.

Out of the money is the term for when an option has not yet reached its strike price. If the option is a call – a bet that the asset will increase in price, equal to buying or going long – being out of the money means that the asset price is still below strike price. If it is a put – a bet that an asset will decrease in price, equal to selling or shorting – the option will be out of the money when the asset’s price is above the strike price.

Out of the money example

If the Australia 200 is trading at 5300 and you believe that its price is increasing, you can take a call option for 6000. While the ASX 200 remains below 6000, it is out of the money and your option cannot be exercised.

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