What Is a Put Option?

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These options will have a delta of less than An OTM call option will have a strike price that is higher than the market price of the underlying asset. Alternatively, an OTM put option has a strike price that is lower than the market price of the underlying asset. Key Takeaways Out of the money is also known as OTM, meaning an option has no intrinsic value, only extrinsic value.

How to BUY a PUT Option - [Option Trading Basics]

A call option is OTM if the underlying price is below the strike price. A put option option on the money for a put option OTM if the underlying's price is above the strike price. An option can also be in the money or at the money.

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This agreed-upon price is referred to as the strike price, and the agreed-upon date is known as the expiration date. An option to buy an underlying asset is a call option, while an option to sell an underlying asset is called a put option.

Article Reviewed on July 31, Michael J Boyle Updated July 31, An option contract's value fluctuates based on the price of the asset underlying it, such as a stock, exchange-traded fund, or futures contract. Each one of these situations affects the intrinsic value of the option. The amount of time remaining before the option contract expires also plays a role in the value of the option, which in turn affects how high or low a price—the premium—the buyer is willing to pay for the option. The buyer could exercise their right under the option contract and buy the underlying asset for less than its current value.

An ATM option is one in which the strike price and price of the underlying are equal. Out-of-the-Money Options You can tell if an option is OTM by determining what the current price of the underlying is in relation to the strike price of that option.

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For a call option, if the underlying price is below the strike price, that option is OTM. For a put option, if the underlying price is above the strike price, then that option is OTM.

What you need to know about cash-covered puts

An out of the money option has no intrinsic valuebut only possesses extrinsic or time value. Being out of the money doesn't mean a trader can't make a profit on that option.

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Each option has a cost, called earnings on the Internet without investments bonus 100 premium. A trader could have bought a far out of the money option, but now that option is moving closer to being in the money ITM.

That option could end up being worth more than the trader paid for the option, even though it is currently out of the money.

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At expiration, though, an option is worthless if it is OTM. Therefore, if an option is OTM, the trader will need to sell it prior to expiration in order to recoup any extrinsic value that is possibly remaining. OTM options are not worth exercising, because the current market is offering a trade level more appealing than the option's strike price.

This gives them the right to buy shares of the stock before the option expires.

Out of the Money (OTM)

While this option is OTM, it isn't worthless yet, as there's still potential to make a profit by selling the option rather than exercising. Prior to expiration, that option will still have some extrinsic value, which is reflected in the premium or cost of the option.

Therefore, the trader could still reap a profit on the OTM option itself by selling it at a higher premium than they paid for it. In this case, our trader ends up with a net profit or benefit.

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In this case, the option is still ITM, but the trader actually lost money. Compare Accounts.