Understanding Outjump in Options Trading

Outjump is a term used in the context of options trading. It refers to the situation where the underlying asset's price exceeds the strike price of a call option, resulting in the option holder receiving an intrinsic value greater than the premium paid for the option.

In other words, if the underlying asset's price jumps above the strike price, the option holder can exercise the option and sell the underlying asset at the higher market price, realizing a profit that is greater than the initial premium paid for the option. This excess profit is referred to as the outjump.

For example, suppose you buy a call option on stock XYZ with a strike price of $50 and the underlying stock is currently trading at $40. If the stock price suddenly jumps to $60, the option holder can exercise the option and sell the stock at $60, realizing a profit of $10 per share ($60 - $50) or 20% above the initial premium paid for the option. This excess profit is the outjump.

Outjump is an important concept in options trading because it can significantly impact the profitability of an options position. It is often used by options traders to gauge the potential profitability of an options trade and to manage their risk exposure.