Out of the Money: Option Basics and Examples

Out-of-the-money (OTM) options are contracts that currently have no intrinsic value, meaning if you exercise them now you’d lose money. However, they can still be valuable if they are held until their expiration date, as they do possess extrinsic or time value. The following presents examples of OTM call and put options:

1. **OTM Call Option Example**: Consider a stock trading at $40 per share, and a call option with a strike price of $50. This option would be OTM because the strike price is higher than the current market price. The option would not be exercisable for a profit at this time, and thus, it has no intrinsic value. However, it still has extrinsic value due to the time premium paid for it.
2. **OTM Put Option Example**: An example of an OTM put option would be a contract with a strike price of $30 and the underlying asset is trading at $40. In this case, the put option would not be exercisable because the strike price is below the current market price, and thus, it would expire worthless if held until expiration.

In conclusion, OTM options are typically less valuable than in-the-money (ITM) or at-the-money (ATM) options, but they can still be traded and held until their expiration date. The decision to buy or sell an OTM option depends on the investor's strategy, risk tolerance, and the potential for the underlying asset's price to move in the desired direction before the option expires.