Out of the Money (OTM)

### What classifies a call option as Out of the Money (OTM)? - [x] The strike price is higher than the current market price of the underlying asset. - [ ] The strike price is equal to the current market price of the underlying asset. - [ ] The strike price is lower than the current market price of the underlying asset. - [ ] It has been held for less than 30 days. > **Explanation:** A call option is considered OTM if the strike price is higher than the current market value of the underlying asset, meaning that exercising the option at the strike price would not be profitable. ### Why might an investor choose to buy an OTM call option? - [ ] Because it guarantees a profit - [x] Because it has a lower premium and potential for high percentage returns - [ ] Because it never expires worthless - [ ] Because it is less risky > **Explanation:** OTM options tend to have lower premiums and offer high potential returns if the underlying asset's price moves significantly in the investor's favor, despite the risk of expiring worthless. ### What happens to an OTM put option at expiration if it remains OTM? - [ ] It gains value. - [ ] It is automatically exercised. - [x] It expires worthless. - [ ] It converts to a call option. > **Explanation:** If a put option remains OTM at the time of expiration, it will expire worthless, and the holder will lose the premium paid for the option. ### How can an OTM option become profitable? - [ ] Through a decrease in implied volatility - [x] If the underlying asset's price moves favorably - [ ] By holding until expiration - [ ] If the time value increases > **Explanation:** An OTM option can become profitable if the underlying asset's price moves favorably before the expiration date, turning the option potentially into the money. ### What is a key risk associated with purchasing OTM options? - [ ] They generate premiums. - [ ] They can be sold anytime. - [x] They may expire worthless. - [ ] They always have high premiums. > **Explanation:** OTM options may expire worthless if the underlying asset price doesn't move as expected, posing a significant risk to the investor who has paid a premium for the option. ### What impacts the premium of an OTM option? - [x] Time value and implied volatility - [ ] Only the underlying asset's current price - [ ] The expiration date solely - [ ] The option's open interest > **Explanation:** The premium of an OTM option is primarily influenced by its time value and the implied volatility of the underlying asset's price. ### Is there any intrinsic value in an OTM option? - [ ] Yes, intrinsic value is based on historical price movements. - [ ] Yes, intrinsic value fluctuates daily. - [x] No, OTM options have no intrinsic value. - [ ] Intrinsic value is indifferent for OTM. > **Explanation:** OTM options have no intrinsic value because exercising them would not result in a profit, thus they are purely valued based on extrinsic factors like time value and volatility. ### What's a primary advantage of trading OTM options? - [ ] Guaranteed return on investment. - [ ] No need for market analysis. - [x] Lower cost to enter the position and high potential returns. - [ ] Exemption from market risk. > **Explanation:** The primary advantage of OTM options is their lower cost compared to ITM options, coupled with the potential for significant gains if the underlying asset's price moves enough to make the options ITM. ### For a put option to be OTM, the strike price must be what compared to the underlying asset's price? - [ ] Equal - [x] Lower - [ ] Higher - [ ] Unchanged > **Explanation:** A put option is OTM if the strike price is lower than the current market price of the underlying asset, meaning selling the underlying asset at the strike price would result in a loss. ### How does the time until expiration affect the value of an OTM option? - [ ] It makes no impact. - [x] More time can increase its value due to greater time value. - [ ] It decreases the option's premium. - [ ] It only affects ITM options. > **Explanation:** More time until expiration generally increases the value of an OTM option as it provides a greater time value, allowing more opportunity for the underlying asset's price to move favorably.