"out of the money" (OTM),

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Options workshop

When an option is "out of the money" (OTM), it means that the option does not have intrinsic value at its current price because it would not be profitable to exercise the option at that moment. An option can be either a call option or a put option, and whether it's in or out of the money depends on the option's strike price and the current market price of the underlying asset.

Let's break down what this means with examples:


  • Out of the Money Call Option (OTM Call):

Suppose you have a call option to buy 100 shares of Company XYZ with a strike price of $50, and the current market price of Company XYZ stock is $45.

In this case, the call option is considered out of the money because if you were to exercise it right now, you would be buying the shares for $50 each when you could simply buy them for $45 in the market. It wouldn't make sense to exercise the option in this situation.

  • Out of the Money Put Option (OTM Put):

Let's say you have a put option to sell 100 shares of Company ABC with a strike price of $70, and the current market price of Company ABC stock is $75.

The put option is out of the money because if you were to exercise it at this moment, you would be selling the shares for $70 each, while they are worth $75 in the market. Again, it would not be a profitable move.

In both of these examples, the options are out of the money because they do not provide any immediate financial benefit if exercised. Traders and investors typically buy OTM options with the hope that the market will move in a favorable direction, causing the option to become in the money (ITM) and potentially profitable in the future. Out-of-the-money options tend to be less expensive than in-the-money options because they have no intrinsic value and rely solely on the possibility of a favorable price move in the underlying asset.

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