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.
Related or Semi-related Video
Finance: What Is a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
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