Out of the money (OTM) describes an option with no intrinsic value—meaning it would not be profitable if exercised immediately. A call option is OTM when the stock price is below the strike price. A put option is OTM when the stock price is above the strike price. OTM options are cheaper because they need the stock to move favorably to have any value at expiration.
- Call OTM: Stock price < Strike price
- Put OTM: Stock price > Strike price
- OTM options have zero intrinsic value
How Out of The Money Works
OTM means no profit if exercised:
Out of The Money Examples:
Stock price: $100
Call Options:
$105 Strike Call: OTM by $5
$110 Strike Call: OTM by $10
$100 Strike Call: ATM
$95 Strike Call: ITM
Put Options:
$95 Strike Put: OTM by $5
$90 Strike Put: OTM by $10
$100 Strike Put: ATM
$105 Strike Put: ITM
OTM options have 100% time value.
Stock needs to move for them to gain intrinsic value.
Quick Reference: OTM Options
| Option | OTM When | Intrinsic Value |
|---|---|---|
| Call | Stock < Strike | $0 |
| Put | Stock > Strike | $0 |
Example: OTM Option Scenarios
OTM Call Outcomes:
| Scenario | Stock at Expiry | $110 Call Value |
|---|---|---|
| Big move up | $120 | $10 (ITM now) |
| Small move up | $108 | $0 (still OTM) |
| No move | $100 | $0 (worthless) |
| Move down | $95 | $0 (worthless) |
OTM call paid $2, needs stock above $112 to profit.
Out of the money means an option has no intrinsic value. Calls are OTM when the stock is below the strike; puts are OTM when the stock is above the strike. OTM options are cheap but often expire worthless. They need significant moves to profit.
OTM Option Characteristics
Lower Delta
OTM options move less with the stock. Delta 0.05-0.40 typically.
Lower Cost
Only paying for time value. Less capital required.
Lower Win Rate
Most OTM options expire worthless. Low probability of profit.
Higher Percentage Returns
When they work, percentage gains can be massive.
Why Trade OTM Options
Leverage
Small premium can control large position. High risk/reward.
Limited Risk
Can only lose the premium. Good for defined-risk speculation.
Tail Events
Cheap way to bet on big moves or black swan events.
Income (Selling)
Selling OTM options collects premium with probability on your side.
OTM Option Risks
Most Expire Worthless
Statistics show majority of OTM options lose 100%.
Need Big Moves
Stock must move significantly AND quickly.
Time Decay
Theta decay is 100% of premium. Clock is always ticking.
Probability is Against You
Low delta = low probability of profit.
OTM vs ITM Comparison
| Factor | OTM | ITM |
|---|---|---|
| Cost | Lower | Higher |
| Win Rate | Lower | Higher |
| % Return Potential | Higher | Lower |
| Intrinsic Value | $0 | Positive |
| Delta | Low (0.05-0.40) | High (0.60-0.95) |
Common Mistakes
-
Buying deep OTM regularly – Lottery tickets. Most expire worthless.
-
Not considering probability – Delta approximates chance of expiring ITM.
-
Ignoring breakeven – Need stock to move past strike plus premium.
-
Holding to expiration – Time value decays to zero. Exit earlier.
How JournalPlus Tracks OTM
JournalPlus logs moneyness and delta at entry, helping you track whether your OTM trades are profitable over time or burning capital.
