outofthemoney

Out of the money (OTM) is a term used in options trading to describe a contract that has no intrinsic value. An option’s intrinsic value is the amount it would be worth if exercised today. If an option has no such value, it is considered OTM and its value is made up entirely of time value and implied volatility.

For call options, an option is OTM when the current price of the underlying asset is below the strike price. Exercising a call would cost more than buying the asset on the open market. For put options, an option is OTM when the current price of the underlying asset is above the strike price. Exercising a put would require selling at the strike price, which is worse than selling at the market price.

OTM options have zero intrinsic value. Their premium reflects time remaining until expiration and expectations about future price movement and volatility. As expiration approaches, OTM options tend to lose value rapidly if the underlying price remains distant from the strike.

An example: if a stock trades at 100, a call with strike 105 is OTM, and a put with strike 95 is also OTM. If the stock moves toward the strike, the option may become ITM (in the money).

OTM options are cheaper than ITM options and offer leveraged exposure to moves in the underlying but carry a higher risk of expiring worthless. They are sensitive to time decay and changes in volatility, making them popular for speculative strategies as well as for hedging approaches that seek low-cost downside or upside exposure.