Out of the money (OTM)

An option with no intrinsic value — it is all time value, and expires worthless if the stock does not move enough.

An option is out of the money (OTM) when exercising it right now would make no sense. For a call, that means the strike sits above the current stock price; for a put, it means the strike sits below it. An OTM option has no intrinsic value at all, so everything you pay for it is time value, which erodes as expiration approaches.

Traders reach for OTM options when they want cheap, leveraged exposure to a move that hasn't happened yet. Say a stock trades at 100 and you buy a 110 call for 1.50. You only start to profit at expiration once the stock clears 111.50. The upside is that a small outlay controls a lot of upside; the trade-off is that you need the stock to actually move, and move in time.

The common mistake is treating cheap OTM options as low risk. They are cheap precisely because they are unlikely to pay off, and theta works against you every day. A far OTM call can lose value even when the stock drifts up, simply because it isn't moving fast enough to beat the clock.

← Back to the glossary · Guides · Strategies

All options terms

Educational use only. Quotes are delayed ~15 minutes and nothing here is financial advice. Options trading involves substantial risk of loss.