What Is "Out of the Money" (OTM)?

"Out of the money" (OTM) is an expression used to describe an option contract

that only contains extrinsic value. These options will have a delta of less than
50.0.

An OTM call option will have a strike price that is higher than the market price of
the underlying asset. Alternatively, an OTM put option has a strike price that is
lower than the market price of the underlying asset.

OTM options may be contrasted with in-the-money (ITM) options.

KEY TAKEAWAYS

• Out of the money is also known as OTM, meaning an option has no

intrinsic value, only extrinsic value.
• A call option is OTM if the underlying price is below the strike price. A put
option is OTM if the underlying's price is above the strike price.
• An option can also be in the money or at the money.
• OTM options are less expensive than ITM or ATM options. This is because
ITM options have intrinsic value, and ATM options are very close to having
intrinsic value.
Volume 75%

1:25
Understanding Out Of The Money Options
Option Basics
For a premium, stock options give the purchaser the right, but not the obligation,
to buy or sell the underlying stock at an agreed-upon price before an agreed-
upon date. This agreed-upon price is referred to as the strike price, and the
agreed-upon date is known as the expiration date.

An option to buy an underlying asset is a call option, while an option to sell an

underlying asset is called a put option. A trader may purchase a call option if
they expect the underlying asset's price to exceed the strike price before the
expiration date. Conversely, a put option enables the trader to profit on a decline
in the asset's price. Because they derive their value from that of an underlying
security, options are derivatives.

An option can be OTM, ITM, or at the money (ATM). An ATM option is one in
which the strike price and price of the underlying are equal.

Unrestricted
Out-of-the-Money Options
You can tell if an option is OTM by determining what the current price of the
underlying is in relation to the strike price of that option. For a call option, if the
underlying price is below the strike price, that option is OTM. For a put option, if
the underlying price is above the strike price, then that option is OTM. An out of
the money option has no intrinsic value, but only possesses extrinsic or time
value.

Being out of the money doesn't mean a trader can't make a profit on that option.
Each option has a cost, called the premium. A trader could have bought a far out
of the money option, but now that option is moving closer to being in the
money (ITM). That option could end up being worth more than the trader paid for
the option, even though it is currently out of the money. At expiration, though, an
option is worthless if it is OTM. Therefore, if an option is OTM, the trader will
need to sell it prior to expiration in order to recoup any extrinsic value that is
possibly remaining.

Consider a stock that is trading at $10. For such a stock, call options with strike
prices above $10 would be OTM calls, while put options with strike prices below
$10 would be OTM puts.

Unrestricted