Out of the money definition

What is out of the money?

Out of the money (OTM) is one of three terms used to address an option’s ‘moneyness’, with the other two being at the money and in the money. An out of the money options contract has not yet reached the value of its strike price, meaning it has no intrinsic value and will expire worthless.

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Out of the money example

Let’s look at two examples of an out of the money options contract – an out of the money call option and an out of the money put option. You would buy a call option if you believed the price of the underlying would increase and you would buy a put option if you believed the price of the underling would fall.

If you had bought a call option, you would need the price of the underlying market to rise above the strike price of the call option in order to achieve a profit. This would enable you to exercise your right to buy the underlying asset at the strike price and sell it back into the market at a higher price for an immediate profit.

A call option is out of the money so long as the underlying is trading below the cost of the strike price of the call option contract.

If you had bought a put option, you would need the price of the underlying market to fall below the strike price of the put option in order for it to be profitable. This would enable you to exercise your right to sell the underlying at the strike price and make a profit on your initial prediction that the price of the underlying will fall.

A put option is out of the money so long as the underlying market is trading above the strike price of the put option contract.

In the money vs out of the money: what’s the difference?

In the money is the opposite to out of the money. It refers to when an options contract – either a call or a put – has an intrinsic value. The buyer of the option is set to make a profit on top of the cost of their premium, because the price of the underling has risen above the strike for a call option or fallen below the strike for a put option.

Because out of the money options have no intrinsic value, the buyer will lose the cost of the premium that they paid to purchase the contract.

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