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What Does It Mean If a Call Option Is Out of the Money?

Published: a month ago


What Does It Mean If a Call Option Is Out of the Money?

A call option is out of the money if the price of the underlying security is below its strike price. There is no benefit to exercising an out-of-the-money option since it's cheaper to purchase the underlying security on the market. For that reason, an option is worthless if it is out-of-the-money when it expires

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Why Buy a Call Option Out of the Money?

An out-of-the-money call option is a speculative play by investors that believe the underlying stock price is likely to increase before the contract expires. If this happens, the trader profits but if it does not, then they incur losses. Many investors buy call options before a company's earnings call or other major announcement. They do this, hoping for positive news about their stock that will push the price up. One famous example of this was during the GameStop short squeeze, when retail speculators correctly predicted the stock would rise.

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