what is out of the money otm 
 out of the money otm is an expression used to describe an option contract that only contains extrinsic value these options will have a delta of less than 0 50 an otm call option will have a strike price that is higher than the market price of the underlying asset alternatively an otm put option has a strike price that is lower than the market price of the underlying asset otm options may be contrasted with in the money itm options investopedia julie bangoption basicsfor a premium stock options give the purchaser the right but not the obligation to buy or sell the underlying stock at an agreed upon price before an agreed upon date this agreed upon price is referred to as the strike price and the agreed upon date is known as the expiration date an option to buy an underlying asset is a call option while an option to sell an underlying asset is called a put option a trader may purchase a call option if they expect the underlying asset s price to exceed the strike price before the expiration date conversely a put option enables the trader to profit on a decline in the asset s price because they derive their value from that of an underlying security options are derivatives an option can be otm itm or at the money atm an atm option is one in which the strike price and price of the underlying are equal or very close to equal out of the money optionsyou can tell if an option is otm by determining what the current price of the underlying is in relation to the strike price of that option for a call option if the underlying price is below the strike price that option is otm for a put option if the underlying price is above the strike price then that option is otm an out of the money option has no intrinsic value but only possesses extrinsic or time value being out of the money doesn t mean a trader can t make a profit on that option each option has a cost called the premium a trader could have bought a far out of the money option but now that option is moving closer to being in the money itm that option could end up being worth more than the trader paid for the option even though it is currently out of the money at expiration though an option is worthless if it is otm therefore if an option is otm the trader will need to sell it prior to expiration in order to recoup any extrinsic value that is possibly remaining consider a stock that is trading at 10 for such a stock call options with strike prices above 10 would be otm calls while put options with strike prices below 10 would be otm puts otm options are typically not worth exercising because the current market is offering a trade level more appealing than the option s strike price out of the money vs in the moneyan option is said to be in the money itm when the current market price of the underlying asset is above the strike price for a call option or below the strike price for a put option for example if the market price of a stock is 60 per share and the strike price of a call option is 50 per share then the option is itm because the holder of the option can exercise it and buy the stock at 50 per share which is below the current market price similarly if the market price of the stock is 40 per share and the strike price of a put option is 50 per share then the option is itm because the holder of the option can exercise it and sell the stock at 50 per share which is above the current market price an option is said to be out of the money otm when the current market price of the underlying asset is below the strike price for a call option or above the strike price for a put option for example if the market price of a stock is 40 per share and the strike price of a call option is 50 per share then the option is otm because the holder of the option cannot exercise it profitably at this time similarly if the market price of the stock is 60 per share and the strike price of a put option is 50 per share then the option is otm because the holder of the option cannot exercise it profitably at this time 1options that are itm generally have higher premium than options that are otm because they give the holder the right to buy or sell the underlying asset at a favorable price however it s important to note that the value of an option is also affected by other factors such as thedelta is a risk measure that estimates the change in an option s price given a 1 change in the underlying security otm options have deltas that are less than 0 50 in absolute value while itm options have deltas that are greater than 0 50 an option whose strike price is just at or very close to the underlying market price is said to be at the money atm atm options have a delta close to 0 50 2out of the money options examplea trader wants to buy a call option on vodafone stock they choose a call option with a 20 strike price the option expires in five months and costs 0 50 this gives them the right to buy 100 shares of the stock before the option expires the total cost of the option is 50 100 shares times 0 50 plus a trade commission the stock is currently trading at 18 50 upon buying the option there is no reason to exercise it because by exercising the option the trader has to pay 20 for the stock when they can currently buy it at a market price of 18 50 while this option is otm it isn t worthless yet as there s still potential to make a profit by selling the option rather than exercising for example the trader just paid 0 50 for the potential that the stock will appreciate above 20 within the next five months prior to expiration that option will still have some extrinsic value which is reflected in the premium or cost of the option the price of the underlying may never reach 20 but the premium of the option may increase to 0 75 or 1 if it gets close therefore the trader could still reap a profit on the otm option itself by selling it at a higher premium than they paid for it if the stock price moves to 22 the option is now itm it is worth exercising the option the option gives them the right to buy at 20 and the current market price is 22 the difference between the strike price and the current market price is known as intrinsic value which is 2 in this case our trader ends up with a net profit or benefit they paid 0 50 for the option and that option is now worth 2 they then net 1 50 in profit or advantage but what if the stock only rallied to 20 25 when the option expired in this case the option is still itm but the trader actually lost money they paid 0 50 for the option but the option only has 0 25 of value now resulting in a loss of 0 25 0 50 0 25 