Out Of The Money - OTM

Loading the player...

What is 'Out Of The Money - OTM'

Out of the money (OTM) is a call option with a strike price that is higher than the market price of the underlying asset, or a put option with a strike price that is lower than the market price of the underlying asset. An out of the money option has no intrinsic value, but only possesses extrinsic or time value. As a result, the value of an out of the money option erodes quickly with time as it gets closer to expiry. If it still out of the money at expiry, the option will expire worthless.

BREAKING DOWN 'Out Of The Money - OTM'

For example, consider a stock that is trading at $10. For such a stock, call options with strike prices above $10 would be out of the money calls, while put options with strike prices below $10 would be out of the money puts. Out of the money options are significantly cheaper than in the money or at the money options, and offer the biggest leverage or bang for the buck if the option trader's view proves to be correct.

In the case of a stock that is trading at $30, a one-month call with a $29 strike may be priced at $1.50, while a one-month call with a $31 strike may be priced at 40 cents. If the stock appreciates to $31 by option expiry, the $29 call would be trading at about $3.00, while the $31 call would be priced around $1.00. In this case, the gross return of 150% for the $31 call is well above the 100% return for the $29 call.

RELATED TERMS
  1. Deep Out Of The Money

    An option with a strike price that is significantly above (for ...
  2. In The Money

    1. For a call option, when the option's strike price is below ...
  3. Near The Money

    An options contract where the strike price is close to the current ...
  4. Bear Call Spread

    A type of options strategy used when a decline in the price of ...
  5. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  6. Bull Call Spread

    An options strategy that involves purchasing call options at ...
Related Articles
  1. Investing

    What Does It Mean When an Option is At The Money?

    The strike price of an at-the-money options contract is equal to its current market price. Options that are at the money have no intrinsic value, but may have time value.
  2. Trading

    How To Manage A Bull Call Spread

    A bull call spread, also called a vertical spread, involves buying a call option at a specific strike price and simultaneously selling another call option at a higher strike price.
  3. Investing

    What Is Option Moneyness?

    Get the basics under your cap before you get into the game.
  4. Trading

    What's the Strike Price?

    The strike price is the price at which a derivative can be exercised, and refers to the price of the derivative’s underlying asset. In a call option, the strike price is the price at which the ...
  5. Investing

    The Basics Of Option Price

    Options can be an excellent addition to a portfolio. Find out how to get started.
  6. Trading

    The Basics of Options Profitability

    The adage "know thyself"--and thy risk tolerance, thy underlying, and thy markets--applies to options trading if you want it to do it profitably.
  7. Investing

    The Importance Of Time Value In Options Trading

    Move beyond simply buying calls and puts, and learn how to turn time-value decay into potential profits.
  8. Investing

    Getting Acquainted With Options Trading

    Learn more about stock options, including some basic terminology and the source of profits.
  9. Trading

    Three Ways to Profit Using Call Options

    A brief overview of how to provide from using call options in your portfolio.
  10. Trading

    A Guide Of Option Trading Strategies For Beginners

    Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.
RELATED FAQS
  1. What is the difference between in the money and out of the money?

    Learn about how the difference between in the money and out of the money options is determined by the relationship between ... Read Answer >>
  2. How does the term 'in the money' describe the moneyness of an option?

    Find out what in the money means about the moneyness of call or put options and what it indicates about the relationship ... Read Answer >>
  3. When is a call option considered to be "in the money"?

    Learn about call options, their intrinsic values and why a call option is in the money when the underlying stock price is ... Read Answer >>
  4. How are call options priced?

    Learn how aspects of an underlying security such as stock price and potential for fluctuations in that price, affect the ... Read Answer >>
  5. What happens when a security reaches its strike price?

    Learn more about the moneyness of stock options and what happens when the underlying security's price reaches the option ... Read Answer >>
  6. Where did the terms in-the-money and out-of-the-money come from?

    Learn what the terms "in the money" and "out of the money" mean, where the terms come from, and how investors use the terms ... Read Answer >>
Hot Definitions
  1. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  2. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  3. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  4. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  5. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
  6. Security

    A financial instrument that represents an ownership position in a publicly-traded corporation (stock), a creditor relationship ...
Trading Center