This term is used in binary options to describe one of the three possible outcomes of a position. This one designates a losing trade.
There are three scenarios that can occur when an option expires: ‘Out Of The Money’ (indicating a loss), ‘In The Money’ (meaning the trader has made a profit on top of the initial investment), and ‘At The Money’, implying that the trade is neither a winning or losing one due to the expiry rate being similar to the strike rate.
When trading binary options, in the event of an expiry price being lower than the strike price, a Call option is said to be Out Of The Money. The same can be said of a Put option when the expiry price is higher than the strike price.
For instance, if a trader places a Call option on the EUR/USD pair at the opening rate of 1.2875 and the option’s closing rate is 1.2874 (1 pip lower), the option is a losing one and is therefore Out Of The Money.
Likewise, if a trader places a Put option on the EUR/USD pair at the opening rate of 1.2875 and the option’s closing rate is 1.2876 (1 pip higher), the option is Out Of The Money and the investment is lost.