Glossary
Out of the money (OTM)
An option with no intrinsic value: a call whose strike is above the stock price, or a put whose strike is below it.
On this page
An option is out of the money (OTM) when exercising it right now would be pointless because it has no intrinsic value. For a call, that means the strike price is above the current stock price; for a put, the strike is below it. OTM options are the cheapest contracts on an option chain, which is exactly why they attract buyers and why most of them expire worthless.
How it works
Moneyness compares the strike with the price of the underlying asset:
| Option | Out of the money when | Example with the stock at $100 |
|---|---|---|
| Call | strike > stock price | $110 call |
| Put | strike < stock price | $90 put |
Because intrinsic value is zero, the whole premium of an OTM option is Time value: the price of the chance that the stock moves past the strike before expiration.
Why it matters
- Low cost, low odds. OTM options give large percentage gains when they pay off, but the probability of finishing in the money is often well under 50%. An option's Delta is a rough guide: a 0.20-delta call has very roughly a one-in-five chance of expiring in the money under the pricing model's assumptions.
- Time decay. With no intrinsic value to fall back on, OTM premiums shrink every day the stock fails to move. See Theta.
- Expiration. Contracts that are OTM at expiration are generally not exercised automatically; they simply lapse.