Deep Out Of The Money

NFL Monday Night Football set a record for total points scored on November 19, 2018 when the Los Angeles Rams defeated the Kansas City Chiefs 54-51 in a dazzling offensive shootout. Anyone betting the under on that game (taking the Las Vegas oddsmakers over/under of 64) lost by over 40 points. That would be an analogous example of deep out of the money, with respect to options contracts.

Option contracts are derivatives tied to underlying securities and are similar to sports betting. Your strike price is the over/under and your expiration date is comparable to when the sports event ends. If you take the over, you are going long a call option, and believe the price will be higher than the strike price. Taking the under is equivalent to going long a put option, and that the price will be below the strike. The premium is the time value left before expiration, which continually erodes to zero.

Example: You paid $3 a share for call options to buy KO at $50, thinking it was soon zooming to $70. It didn't. Instead, the company missed their quarter badly, and the stock is now trading at $36 a share. Your $50 strike calls are deep out of the money...by $14.

Better luck next time.