Out of The Money (OTM)
Candlefocus EditorFor call options, OTM means that the strike price of the option is higher than the current market price of the underlying asset. This means that if you were to exercise the option today, there would be an immediate loss equal to the cost of the premium, as you would be paying more for the underlying asset than the prevailing market price. As the option has no intrinsic value, the total loss would be equal to the cost of the premium and there would be no benefit to exercising the option.
For put options, OTM means that the underlying asset is trading at a higher price than the strike price of the option. This means that if you were to exercise the option today, there would be an immediate loss equal to the cost of the premium due to the difference between the strike price and the current market price. As with call options, there will be no benefit to exercising an OTM put option, as there is no intrinsic value.
Because OTM options have no intrinsic value, they are generally less expensive than in the money (ITM) or at the money (ATM) options. This is because ITM options have some intrinsic value, and ATM options are very close to having intrinsic value. The reduced cost of OTM options makes them attractive to investors who seek to speculate on an underlying asset, but who wish to limit their downside risk by paying less for the option. Speculating with OTM options can lead to greater upside potential, as well as greater losses as the underlying asset price moves against them.