How Does the Probability of Exercise for a Deep OTM Option Compare to an ATM Option?
The probability of exercise for a deep OTM option is extremely low, approaching zero, as the underlying price must move significantly to reach the strike. An ATM option has the highest probability of exercise, approximately 50% for the option to move ITM and be exercised.
The difference is stark, reflecting the difference in premium and risk profile.
Glossar
Deep OTM Option
Exposure ⎊ A Deep OTM Option represents a position with a very low probability of finishing in-the-money at expiration, resulting in minimal immediate directional exposure.
Atm Option
Strike ⎊ An At-the-Money (ATM) option is characterized by its strike price being precisely equal, or extremely close, to the current market price of the underlying cryptocurrency asset.
OTM Option
Definition ⎊ An OTM option, or out-of-the-money option, is a derivative contract where the strike price is unfavorable relative to the current market price of the underlying asset.
Probability of Exercise
Exercise ⎊ Probability of Exercise is the statistical likelihood that an option contract will finish in the money at expiration, allowing the holder to exercise their contractual right profitably.
Probability
Modeling ⎊ Probability is fundamental to quantitative finance, providing the mathematical framework for modeling asset price movements and calculating risk.