far out of the money
Far Out of the Money describes an option so distant from a profitable strike price that it is cheap to buy but very unlikely to ever pay off.
In plain English
There is a man who used to stand near the mile two bridge in Lagos selling raffle tickets for a car you would win if your number matched. Everybody bought one because it was ₦200 and the car was a Toyota. Nobody expected to win, but for ₦200, why not dream a little.
That raffle ticket is exactly what a far out of the money option feels like. You are buying the right to buy or sell a stock at a price so far from where it currently trades that the odds of it ever being useful are slim. But the ticket costs so little that people buy it anyway, just in case the market does something wild.
Say a stock on the Nigerian Exchange, like a mid tier bank stock, is trading at ₦25 per share. An option that lets you buy it at ₦45 before the month ends is far out of the money. For that stock to reach ₦45, something dramatic would need to happen, a merger, an unexpected profit surge, a takeover rumour that turns real. Most of the time it will not happen, and the option expires worthless.
In London, traders call these options lottery tickets too, and they are popular right before big news, like when a company is expecting a court ruling or a drug trial result. The option costs pennies, but if the news breaks the right way, the payout can be enormous compared to what was paid.
The lesson for anyone dabbling in options, especially someone abroad trying to grow money sent home into an investment account, is that cheap does not mean safe. A far out of the money option can wipe out your small stake completely, over and over, while you wait for the one time it hits big. Some people build a whole strategy around buying many of these small bets, accepting that most will lose so that the rare winner covers the rest.
An investor buys a call option on a stock trading at ₦25, with a strike price of ₦45, for a premium of ₦150 per contract. If the stock stays below ₦45 by expiry, which is likely, the ₦150 is lost entirely. If news causes the stock to jump to ₦60, the option becomes valuable and the investor could earn many times the ₦150 paid.
Questions people ask
Why would anyone buy an option that is unlikely to pay off?
Because the cost is so low that the potential reward, if it does pay off, can be many times the amount risked. Some traders buy several of these small bets on purpose, treating the loss as the price of staying in the game for that one big win.
Is far out of the money the same as a bad investment?
Not automatically. It depends on the strategy. Used alone and repeatedly without a plan, it usually drains money slowly. Used deliberately as a small side bet within a bigger, well managed portfolio, it can add excitement without threatening your main savings.
How far out of the money is too far?
There is no fixed rule, but the further the strike price sits from the current market price, the cheaper and less likely to pay off the option becomes. A useful habit is to only risk an amount you are fully prepared to lose completely, since that is the most probable outcome.
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