Out of the money

One of the three descriptions of moneyness, the relationship between an option's strike and the current price of the underlying asset. A call is out of the money while the strike sits above the current price, because buying at the strike would cost more than buying in the market. A put is out of the money while the strike sits below it, for the mirror reason. At the money describes a strike level with the market, and in the money describes the profitable side of the same relationship.

The label is really a statement about value. An option's premium divides into intrinsic value, what exercising would be worth now, and time value, what the possibility of that changing before expiry is worth. Out of the money means the first component is zero, so the entire premium is the second, and it therefore decays as expiry approaches and responds sharply to changes in expected volatility. Such an option also moves less than the underlying for a given move, which is what a small delta describes.

Two confusions are common. Out of the money is not worthless: time value is a real price paid and received, and contracts trade in that state throughout their lives. And it is not the same as a loss. Moneyness describes the contract's relationship to the price at a moment, while the holder's result also depends on the premium paid, so a position can be profitable while the option is out of the money and unprofitable while it is in. Only the state at expiry decides what settles.