liveBook · Manning

Out-of-the-money option

As explained in Investing for Programmers

An out-of-the-money option is an option with no intrinsic value because exercising it at the current market price would be unfavorable.

An out-of-the-money (OTM) option has no intrinsic value: exercising it immediately would be unfavorable. A call is OTM when its strike exceeds the market price; a put is OTM when its strike is below it. section 7.4.1

At expiration, the option’s outcome depends on whether the asset crosses its strike:

  • If the asset never crosses the strike, the OTM option expires worthless. section 7.4.1
  • If the asset crosses the strike, the option becomes in the money (ITM). section 7.4.1

OTM options in an iron condor

With ACME at $100, an iron condor can sell an OTM $120 call and an OTM $80 put while buying protective OTM options at $130 and $70. If ACME remains between $80 and $120 at expiration, the short options expire worthless and the strategy keeps its net premium; sharp moves activate the protective options and cap losses. section 7.4.1

How Investing for Programmers covers it

How deep it goes
Defines intrinsic value and strike relationships, then applies them to expiration and a four-leg iron condor example.
Examples
Uses ACME at $100 with $120, $80, $130, and $70 strikes in a six-month European-style iron condor.
What it assumes
Introduces option buying, selling, premiums, strike prices, exercise rights, and obligations alongside the OTM definition.
What you can do after
Evaluate whether an option is OTM and understand how OTM legs behave within an iron condor.
How it connects
Connects intrinsic value with call options, put options, in-the-money options, expiration, iron condors, and credit spreads.
Cover of Investing for Programmers
liveBookmanning.com
Read Investing for Programmers on liveBook Get the book at manning.com

This explainer was generated by Manning's knowledge graph from the text of Investing for Programmers. The section links point to the parts of the book it draws on.