Out Of The Money
An option with no intrinsic value, whose entire premium is time and volatility.
Also called: otm
In plain language
A call is out of the money when the underlying is below the strike; a put when it is above.
These options are cheap because they are unlikely to pay off. The low price is the market’s estimate of probability, not a discount.
They offer the largest percentage gains when they work, and expire worthless most of the time.
Why it matters
Out-of-the-money options are the most common way beginners lose money in options: the lottery-ticket payoff obscures how often the outcome is a total loss.
Common mistakes
- Buying far out-of-the-money options because more contracts fit the budget.
- Assuming a directional call is enough. The move must also be large enough and fast enough.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
An option that currently has intrinsic value.
The part of an option’s premium beyond intrinsic value, reflecting time and volatility.
How much value an option loses per day purely from the passage of time.
How much an option’s price moves for a $1 move in the underlying.
The price at which an option contract can be exercised.