Glossary term
Out of The Money (OTM)
Out of the money means an option has no intrinsic value because exercising it would not be favorable at the current underlying price.
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What Does Out of The Money Mean?
Out of the money, often shortened to OTM, means an option has no intrinsic value at the current underlying price. A call option is out of the money when the underlying price is below the strike price. A put option is out of the money when the underlying price is above the strike price.
An OTM option can still have a price because it may have time value. The buyer is paying for the possibility that the underlying asset moves favorably before expiration.
Key Takeaways
- An out-of-the-money option has no intrinsic value at the current underlying price.
- A call is OTM when the underlying price is below the strike price.
- A put is OTM when the underlying price is above the strike price.
- OTM options can expire worthless if they do not move into the money before expiration.
Call and Put Examples
If a stock trades at $60 and a call option has a $70 strike price, the call is out of the money. Buying at $70 would not be useful when the market price is $60. If a stock trades at $60 and a put option has a $50 strike price, the put is out of the money because selling at $50 is not favorable while the market is higher.
Option Type | Out of the Money When | What Must Happen for Intrinsic Value |
|---|---|---|
Call | Underlying price is below strike price | The underlying price must rise above the strike. |
Put | Underlying price is above strike price | The underlying price must fall below the strike. |
Why OTM Options Still Trade
OTM options can be attractive because they usually cost less than in-the-money options. That lower premium comes with a lower probability of finishing with intrinsic value. The investor may lose the entire premium if the option expires out of the money.
For sellers, OTM options may appear safer because the underlying has room to move before the option becomes intrinsic. That does not remove risk. A sharp move in the underlying can quickly turn an OTM option into an ITM obligation.
Price, Time, and Volatility
The value of an OTM option depends heavily on time remaining and expected volatility. More time and higher implied volatility can make an OTM option more expensive because there is more chance of a favorable move. As expiration approaches, time value can decay quickly if the underlying does not move enough.
The Bottom Line
Out of the money means an option has no intrinsic value right now. It can still have speculative value, but the buyer needs a favorable move before expiration and can lose the full premium if that move does not arrive.