Out of the Money (OTM): What It Means in Options Trading
How Out of the Money Works
An option’s “moneyness” tells you the relationship between the current market price and the strike price. When an option is out of the money, exercising it would mean buying (for calls) at a higher price than the market, or selling (for puts) at a lower price — neither of which makes economic sense.
OTM options still have value before expiration because there’s a chance the underlying could move in the right direction. That remaining value is entirely time value (also called extrinsic value).
OTM for Calls vs. Puts
| Option Type | OTM When… | Example |
|---|---|---|
| Call option | Stock price < Strike price | Stock at $95, strike at $100 → OTM by $5 |
| Put option | Stock price > Strike price | Stock at $105, strike at $100 → OTM by $5 |
Why Traders Buy OTM Options
OTM options are cheaper than at-the-money or in-the-money contracts because they carry no intrinsic value. That lower premium is what attracts traders looking for leveraged exposure or cheap protection.
The trade-off is straightforward: OTM options have a lower probability of finishing profitable, but they offer outsized percentage returns if the underlying makes a large move. Strategies like strangles and iron condors are built around selling or buying OTM options at various distances from the current price.
OTM Options and the Greeks
OTM options behave differently from ITM options when it comes to the Greeks:
| Greek | OTM Behavior |
|---|---|
| Delta | Below 0.50 for calls, above −0.50 for puts — smaller price sensitivity |
| Gamma | Lower than ATM options; increases as the option approaches the strike |
| Theta | Time decay accelerates as expiration nears, especially for near-OTM strikes |
| Vega | Still meaningful — OTM options are heavily influenced by implied volatility |
What Happens to OTM Options at Expiration?
If an option is still out of the money at expiration, it expires worthless. The buyer loses the entire premium paid, and the seller keeps the full premium as profit. This is why a large percentage of options — particularly far-OTM contracts — expire with zero payout.
Out of the Money vs. In the Money vs. At the Money
| Moneyness | Call Option | Put Option | Intrinsic Value |
|---|---|---|---|
| In the money (ITM) | Stock > Strike | Stock < Strike | Positive |
| At the money (ATM) | Stock ≈ Strike | Stock ≈ Strike | Zero (or near zero) |
| Out of the money (OTM) | Stock < Strike | Stock > Strike | Zero |
For a deeper look at how these relate to option pricing, see Options Pricing and How Options Work.
Key Takeaways
- An option is out of the money when exercising it would result in a loss relative to the current market price.
- OTM calls have a stock price below the strike; OTM puts have a stock price above the strike.
- OTM options are cheaper because their value is 100% time value — no intrinsic value.
- They expire worthless if still OTM at expiration, but serve key roles in strategies and hedging.
- Implied volatility has a strong impact on OTM option premiums.
Frequently Asked Questions
Is it bad to buy out-of-the-money options?
Not inherently. OTM options offer lower cost and higher leverage, making them useful for speculative trades and portfolio protection. The risk is that they have a higher probability of expiring worthless. It depends on your strategy and risk tolerance.
Do OTM options have any value?
Yes — before expiration, OTM options have time value. The more time remaining and the higher the implied volatility, the more an OTM option is worth.
What percentage of options expire out of the money?
Roughly 60–80% of options that are held to expiration expire worthless, though many are closed or rolled before that date. The exact figure varies by market conditions and how far OTM the options are.
Can an OTM option become in the money?
Absolutely. If the underlying asset’s price moves past the strike price, the option moves from OTM to ATM and then ITM. This is what OTM buyers are betting on.