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The phrase "out of the money" in finance describes a situation where a financial option has no inherent value since the strike price is unfavorable to the option holder. An option is a contract that grants the holder the right, but not the duty, to purchase or sell the underlying asset at a defined price (known as the strike price), on or before a specific date.
An option is said to be "out of the money" if the underlying asset's current market price does not favor the option holder. For instance, the call option is considered to be "out of the money" since it has no intrinsic value if an investor retains it to purchase a stock at a strike price of $100 but the stock's current market price is only $80.
In this case, the option holder has the choice to decide whether to exercise the option or let it expire. As an alternative, the option holder can try to sell the option to a different investor who predicts that the stock price will rise above the strike price before the option expires, making the option profitable.
An "in the money" option is the opposite of a "out of the money" option and has inherent value because the underlying asset's current market price is in the option holder's favor. The option in the previous example would be "in the money" if the stock's current market price was $120 because the option holder could purchase the shares for $100 and sell them for $120 right away, making a profit.
Investors who trade options should be aware of whether an option is "in the money," "out of the money," or "at the money" (when the strike price coincides with the current market value of the underlying asset), since this might affect the value and profitability of their investments.
