Out of the Money
A call option with a strike price that is much greater than the current stock price is considered to be out of the money. For instance, a call option with a strike price of $55 and a stock price of $50 is considered to be out of the money. A put option with a strike price that is much lower than the current stock price is considered to be out of the money. For instance, put option with a strike price of $45 and a stock price of $50 is considered to be out of the money. Out of the money options tend to trade for low dollar amounts. That’s because there is a small probability that the stock will make a large move. Option buyers can buy many out of the money options and if the stock makes an explosive move, they will make a very large return on their investment. Option sellers like to sell this premium because there is a high likelihood that the option will expire and they will keep the proceeds from the sale of the option. Just because these options trade at a low dollar value does not mean they are “cheap”. It is important to check the implied volatility of the options.
