When is a call considered out of the money?

A call option is considered out of the money when the market price of the underlying asset is less than the exercise price (also known as the strike price). This situation means that exercising the call option would not be profitable for the holder because they would have to pay a higher price to purchase the asset than what it is currently worth in the market.

For instance, if the exercise price of the call option is set at $50, and the market price of the underlying asset falls to $40, the option holder would not exercise their option as it would be cheaper to buy the asset directly from the market at $40. Thus, the potential for profit does not exist in this scenario; hence, the call option is termed out of the money.

Understanding this relationship is crucial in options trading, as it helps investors make informed decisions about whether to hold, exercise, or sell their options based on current market conditions.