Out of the Money

An option with no intrinsic value — for a call, when the stock is below the strike; for a put, when the stock is above the strike.

"Out of the money" (OTM) options have no immediate exercise value — only time value and the possibility of moving into the money before expiration. A call with a $60 strike when the stock is trading at $55 is $5 out of the money. A put with a $45 strike when the stock is at $50 is also out of the money. At expiration, all out-of-the-money options expire completely worthless.

OTM options are less expensive than in-the-money options and offer higher leverage: a smaller premium can control 100 shares of the underlying, providing a large percentage return if the underlying makes a significant move. However, they have a lower probability of expiring with value — a far OTM option might cost $0.20 and have only a 5–10% probability of expiring in the money. Most OTM options expire worthless.

For option sellers, OTM options are the most commonly sold because the probability of them expiring worthless is high. Selling OTM covered calls and cash-secured puts are bread-and-butter income strategies that exploit the tendency of OTM options to expire worthless while defining maximum risk. The premium collected is smaller than for ATM options, but so is the probability of the option moving against the seller.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.