Underwater

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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.

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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.

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RELATED FAQS
  1. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  2. What are the main risks associated with trading derivatives?

    The primary risks associated with trading derivatives are market, counterparty, liquidity and interconnection risks. Derivatives ... Read Full Answer >>
  3. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  4. What is the difference between derivatives and options?

    Options are one category of derivatives. Other types of derivatives include futures contracts, swaps and forward contracts. ... Read Full Answer >>
  5. How are rights distributed in a rights offering?

    In a rights offering, rights are distributed to shareholders based on the number of shares they already own. What Is a Rights ... Read Full Answer >>
  6. What risks should I consider taking a short put position?

    The risks to consider before taking a short put position are the odds of sustained weakness in the asset price and a spike ... Read Full Answer >>

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