DEFINITION of 'Underwater'
An option that would be worthless if it expired today. An underwater option may be either a call or put option. A call option is underwater when its strike price is higher than the market price of the underlying asset. A put option is underwater when its strike price is lower than the market price of the underlying asset. An option's value is determined by its intrinsic value, time to expiration, volatility and the underlying asset's current value.
BREAKING DOWN 'Underwater'
An underwater option is also known as an "out of the money option." These options are less expensive to purchase but are considered riskier because they are more likely than inthemoney options to expire worthless. A trader might choose to buy underwater options if he had little capital to invest or if he expected a significant move in the underlying asset's price.

In The Money
1. For a call option, when the option's strike price is below ... 
Out Of The Money  OTM
A call option with a strike price that is higher than the market ... 
Put On A Call
One of the four types of compound options, this is a "put" option ... 
At The Money
A situation where an option's strike price is identical to the ... 
Deep Out Of The Money
An option with a strike price that is significantly above (for ... 
Bear Call Spread
A type of options strategy used when a decline in the price of ...

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