Underwater

Loading the player...

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 in-the-money 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.

RELATED TERMS
  1. Put On A Call

    One of the four types of compound options, this is a "put" option ...
  2. Out Of The Money - OTM

    A call option with a strike price that is higher than the market ...
  3. Deep Out Of The Money

    An option with a strike price that is significantly above (for ...
  4. In The Money

    1. For a call option, when the option's strike price is below ...
  5. Bear Call Spread

    A type of options strategy used when a decline in the price of ...
  6. Call On A Put

    One of the four types of compound options, this is a call option ...
Related Articles
  1. Budgeting

    Explaining Underwater Loans

    Feel like you're drowning in debt? It may be because your loans have gone underwater.
  2. Options & Futures

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  3. Term

    What Drives An Option's Price?

    The primary drivers of an option’s price are the underlying stock’s current price, the option’s intrinsic value, its time to expiration and volatility.
  4. Options & Futures

    The Basics of Options Profitability

    The adage "know thyself"--and thy risk tolerance, thy underlying, and thy markets--applies to options trading if you want it to do it profitably.
  5. Options & Futures

    What Is Option Moneyness?

    Get the basics under your cap before you get into the game.
  6. Home & Auto

    Dealing With An Underwater Mortgage During Divorce

    Going through a divorce is chaotic enough, but throw in a house with an underwater mortgage and things get particularly messy.
  7. Options & Futures

    The Anatomy of Options

    Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio.
  8. Options & Futures

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
  9. Options & Futures

    Exploring The World Of Exotic Options

    Exotic options provide investors with new alternatives to manage their portfolio risks and speculate on various market opportunities. The pricing for such instruments is considerably complex, ...
  10. Options & Futures

    Getting A Handle On The Options Premium

    The price of an option, otherwise known as the premium, has two basic components: the intrinsic value and the time value. Understanding these factors better can help the trader discern which ...
RELATED FAQS
  1. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  2. How are call options priced?

    Learn how aspects of an underlying security such as stock price and potential for fluctuations in that price, affect the ... Read Answer >>
  3. What happens when a security reaches its strike price?

    Learn more about the moneyness of stock options and what happens when the underlying security's price reaches the option ... Read Answer >>
  4. How do speculators profit from options?

    As a quick summary, options are financial derivatives that give their holders the right to buy or sell a specific asset by ... Read Answer >>
  5. When is a call option considered to be "in the money"?

    Learn about call options, their intrinsic values and why a call option is in the money when the underlying stock price is ... Read Answer >>
  6. Do options make more sense during bull or bear markets?

    Understand how options may be used in both bullish and bearish markets, and learn the basics of options pricing and certain ... Read Answer >>
Hot Definitions
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  2. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  3. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  4. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  5. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  6. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
Trading Center