Out of the money, often shortened to OTM, describes an option whose strike price is unfavourable compared with the current market price of the underlying. Exercising it right now would not create a profit.
A call option is OTM when the underlying price is below its strike. A put option is OTM when the underlying price is above its strike. In both cases the option has zero intrinsic value, so any premium you see is entirely time value and volatility.
How to tell if a call or put is out of the money
The rule is simple and it is the same across equities, indices, futures, FX and crypto options:
- Calls are OTM if Underlying Price < Strike Price.
- Puts are OTM if Underlying Price > Strike Price.
Traders also describe how far an option is out of the money. You can measure the distance in currency terms, in percentage terms, or in standard deviations when using models. For example, with the share price at 100, a 105 call is 5 points or 5 percent OTM. A 95 put is also 5 points OTM, just on the other side.
At the money sits around the current price. In the money is the opposite of OTM and means immediate exercise would have value. Options can move between these states as the underlying price changes.
What OTM means for price, time value and the Greeks
Because an OTM option has no intrinsic value, its premium is made up of time value. Time value reflects two things: the time remaining until expiry and the market’s view of future volatility. More time and higher expected volatility both raise the chance that the option could become profitable before it expires, so they tend to lift the price of OTM options.
The Greeks capture how sensitive the premium is to different drivers:
- Delta is small for far OTM options. A deep OTM call might have a delta near 0.05, meaning a small change in premium for a 1 point move in the underlying. Deltas rise as strikes move closer to the market.
- Gamma and vega are lowest for far OTM and deep ITM options and highest near at the money. That is why a slightly OTM option can respond more to changing volatility than a very far OTM one.
- Theta measures time decay. Far OTM options lose value slowly when there is lots of time left, then decay speeds up as expiry approaches, especially around at the money.
Different models can quote slightly different probabilities and sensitivities. Pricing also varies by venue and broker, and by whether the option is American style or European style. Those conventions affect early exercise rights but not the definition of OTM itself.
Where you will see OTM in trading and reporting
You will find moneyness labels on option chains, position statements and risk reports. Chains often colour code strikes to show which are OTM and which are ITM. In conversations, traders might say they are buying an OTM call, selling a slightly OTM put, or rolling a position further out of the money.
Writers of options think about OTM in a different way to buyers. A short option that is OTM has no immediate assignment risk. Assignment generally happens when an option is in the money near expiry, or earlier for American style contracts when early exercise is economical. That said, an OTM option can become ITM quickly if the underlying jumps.
Moneyness also appears in structured products, warrants and options on futures. The same comparison applies. A crude oil call on a futures contract is OTM if the futures price is below the strike. Crypto options on major coins use exactly the same language.
Example: moving between OTM, at the money and in the money
Imagine a stock trading at 100. Consider three one month options:
- A 105 call is 5 points OTM. It has zero intrinsic value. Its premium reflects time and volatility only.
- A 100 call is at the money. It still has zero intrinsic value but higher time value than the 105 call because a smaller move would make it profitable.
- A 95 call is in the money by 5 points. Its premium includes at least 5 points of intrinsic value plus any extra time value.
If the stock rises to 107, the 105 call flips from OTM to ITM by 2 points. If it falls to 93, the 95 call moves from ITM to OTM by 2 points. This is why traders watch moneyness. It shapes the payoff at expiry and the sensitivity of the option between now and then.
For puts, reverse the logic. With the same stock at 100, a 95 put is OTM by 5. A drop to 92 makes it ITM by 3. A move to 108 leaves it deeper OTM and usually worth less, other things unchanged.
Why traders use out of the money options
OTM options are popular because they are cheaper per contract than at the money ones and can offer clear asymmetric payoffs. Here are common uses:
- Directional plays with limited cost. Buying an OTM call caps the upfront spend while keeping upside if a strong rally arrives.
- Hedging tail risk. A portfolio manager might buy deep OTM puts as disaster insurance, accepting that many will expire without being used.
- Income strategies. Some traders sell slightly OTM options to collect premium, expecting them to expire worthless. This carries downside if the market moves through the strike.
- Spread construction. Vertical spreads often combine OTM and ITM legs to control risk, cost and probability of profit.
None of these approaches is automatically better. The trade off is always between cost, probability and payoff size. Far OTM options are cheap for a reason, since the chance of finishing in the money is lower.
Common pitfalls and points to check
Out of the money does not mean worthless. Before expiry, OTM options can have meaningful value, especially when there is ample time left or implied volatility is high. They only become worthless if they are still OTM at expiry, at which point they expire with no value to exercise.
Be careful with how strikes are quoted. Some markets use price in points, others use tick values or multipliers for contracts. The notional exposure can be much larger than the option’s quoted premium, which affects risk sizing. Platform displays differ by provider, so check how your broker shows moneyness and whether colours, labels and filters match the rules above.
Remember that dividends, carrying costs and interest rates can tilt relative pricing between calls and puts. They do not change which options are OTM, but they do influence premiums and early exercise decisions in styles that allow it.
Finally, moneyness moves with the market. An option can start far OTM and drift into the money over days or even minutes. That path matters because time decay and changing volatility can help or hurt even when the final outcome is the same.