Out-of-the-money. No money. No wins for you. Bad. Sad. Frowny face. That's what happens when you're out-of-the-money and you own an option.
The basics:
A stock option carries a strike price. If you own a call option, then that call isn't worth anything intrinsically until the underlying security is worth more than the strike price of the option.
Example:
A call option has a strike price of $20 and the underlying stock is trading at $22.30...it's $2.30 in-the-money. If the stock was trading at $17.40, then that call option (the right to pay $20 to buy a share of that stock) is $2.60 out-of-the-money.
The curveball here is time, or Theta. Your option doesn't expire for 20 weeks. It would probably still carry a lot of value. That is, the holder might ask what the odds were that, in the next 50 or so trading days, the stock could spike and trade to, say, $21.30, and then carry intrinsic value of $1.30? If it's a volatile stock, odds are probably good, i.e. that call option with a strike price at $20, expiring in 4-5 months, is probably still worth a fair pot of money, even if the stock today is trading below the strike price, like at $18.32 or whatever.
See: VIX. See: Black-Scholes. See: Theta Decay.
Related or Semi-related Video
Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
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