What is Out of the Money (OTM)? Meaning & Examples

When learning about options trading, one of the most important concepts to understand is Out of the Money (OTM). Traders often ask, “What is Out of the Money (OTM)? Meaning & Examples?” because knowing whether an option is in the money or out of the money directly impacts risk, cost, and potential profit. In this article, we’ll explain exactly what OTM means, how out of the money call and put options work, and provide real examples to help you see the difference between in the money vs out of the money options.

What is Out of the Money (OTM)? Meaning

Out of the money (otm) is a term used in options trading to describe an option that has no intrinsic value.

For a call option, this happens when the strike price is higher than the current market price of the underlying asset.

For a put option, it means the strike price is lower than the market price. Because out of the money options only carry time value, they are cheaper to buy but also riskier, as they require significant price movement before expiration to become profitable.

Because OTM options are cheaper than in-the-money (ITM) options, they attract traders looking for leveraged exposure with lower upfront costs.

Out of the Money Examples

Example of an OTM Call Option

• Stock XYZ trades at $50.
• A trader buys a call option with a strike price of $60.
• Since $60 is above the current market price ($50), the option is out of the money.
• For the option to become profitable, XYZ must rise above $60 before expiration.

Example of an OTM Put Option

• Stock ABC trades at $40.
• A trader buys a put option with a strike price of $30.
• Since $30 is below the current market price ($40), the put is out of the money.
• For the option to gain intrinsic value, ABC must fall below $30.

Out of the Money Call Options vs Put Options

Out of the Money (OTM) options can be either calls or puts, and the difference comes down to the relationship between the strike price and the current market price of the underlying asset.

Out of the Money Call Options

• A call option gives the buyer the right (but not the obligation) to purchase the underlying asset at the strike price.
• A call is OTM when the strike price is higher than the current market price.
• Example: If Apple stock is trading at $150, a call option with a strike price of $170 is OTM. The buyer would not exercise this option today, because buying at $170 makes no sense when the stock is available in the market for $150.
• Traders buy OTM calls if they believe the stock will rise sharply above the strike before expiration, offering high upside potential with limited risk (the premium paid).

Out of the Money Put Options

• A put option gives the buyer the right (but not the obligation) to sell the underlying asset at the strike price.
• A put is OTM when the strike price is lower than the current market price.
• Example: If Tesla stock is trading at $250, a put option with a strike price of $220 is OTM. The buyer would not exercise this option now, because selling at $220 makes no sense when the stock can be sold at $250 in the market.
• Traders use OTM puts when they expect a strong decline in the asset’s price, or as a cheaper way to hedge portfolios against downside risk.

Feature	OTM Call Options	OTM Put Options
Condition	Strike price > market price	Strike price < market price
Profit If	Asset price rises above strike	Asset price falls below strike
Typical Use	Bullish speculation, leveraged upside	Bearish speculation, downside protection
Risk	Can expire worthless if price doesn’t rise	Can expire worthless if price doesn’t fall

In the Money vs Out of the Money

When trading options, one of the most common comparisons is between in the money (ITM) and out of the money (OTM). The distinction lies in whether the option has intrinsic value at the current market price.

In the Money (ITM) Options

• An option is in the money when exercising it right now would generate a profit.
• ITM Call Option: The strike price is below the current market price.
• Example: Stock is at $100, call strike = $90 → already profitable, since buying at $90 and selling at $100 creates value.
• ITM Put Option: The strike price is above the current market price.
• Example: Stock is at $80, put strike = $90 → profitable, since selling at $90 when the market is only offering $80 has value.
• ITM options are more expensive because they contain intrinsic value + time value.

Out of the Money (OTM) Options

• An option is out of the money when exercising it now would not be profitable.
• OTM Call Option: Strike price is above the current market price.
• Example: Stock is at $100, call strike = $120 → worthless today, since buying at $120 makes no sense when stock is $100.
• OTM Put Option: Strike price is below the current market price.
• Example: Stock is at $100, put strike = $80 → worthless now, since selling at $80 is worse than selling at $100.
• OTM options are cheaper, carrying only time value, but riskier because they may expire worthless.

Are Out of the Money Options Worth Buying?

Yes, but it depends on your strategy. OTM options are cheaper than in-the-money options and can deliver high percentage gains if the underlying asset makes a strong move. However, they also have a higher chance of expiring worthless.

Why do traders buy out of the money call options?

Traders buy OTM calls when they believe the underlying asset’s price will rise sharply before expiration. It allows them to gain leveraged exposure at a lower cost compared to ITM calls.

Why do traders buy out of the money put options?

OTM puts are often used when traders expect a significant decline in the underlying asset. They are also popular for hedging portfolios against potential downside risk.

Conclusion

Understanding the difference between in the money vs out of the money options is essential for every trader. While OTM options offer lower costs and higher leverage, they also carry more risk of expiring worthless. On the other hand, ITM options provide intrinsic value and a safer approach, but at a higher premium. Knowing when to use each type depends on your trading strategy, risk tolerance, and market outlook.

At Ultima Markets, we make learning and trading options easier with access to advanced tools, real-time market insights, and educational resources designed for traders of all levels. Whether you’re exploring out of the money call options for speculation or in the money puts for hedging, Ultima Markets provides the support you need to make informed decisions.