Deep Out Of The Money

AAA

DEFINITION of 'Deep Out Of The Money'

An option with a strike price that is significantly above (for a call option) or below (for a put option) the market price of the underlying asset. To be deemed deep out of the money, an option's strike price should be at least one strike price below/above the market price of the underlying asset's option chain.

INVESTOPEDIA EXPLAINS 'Deep Out Of The Money'

For example, if the current price of the underlying stock is $10, a put option with a strike price of $5 would be considered deep out of the money.

While a deep of out the money option seems worthless, the derivative still holds some value. All options, both in and out of the money, contain time value. Time value measures the benefit of having an option with time remaining until maturity. So, while a deep out of the money call or put has no intrinsic value, some investors may be willing to pay a small amount for the remaining time value. However, this time value decreases as the option moves closer to its expiry date.

VIDEO

RELATED TERMS
  1. Near The Money

    An options contract where the strike price is close to the current ...
  2. Moneyness

    A description of a derivative relating its strike price to the ...
  3. Intrinsic Value

    1. The actual value of a company or an asset based on an underlying ...
  4. Underwater

    An option that would be worthless if it expired today. An underwater ...
  5. Time Value

    The portion of an option's premium that is attributable to the ...
  6. Derivative

    A security whose price is dependent upon or derived from one ...
Related Articles
  1. Naked Call Writing: A Risky Options ...
    Options & Futures

    Naked Call Writing: A Risky Options ...

  2. The Importance Of Time Value In Options ...
    Options & Futures

    The Importance Of Time Value In Options ...

  3. Options Basics Tutorial
    Options & Futures

    Options Basics Tutorial

  4. Understanding Out Of The Money Options
    Options & Futures

    Understanding Out Of The Money Options

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center