What does out of the money mean in options?
In one line: An option is out of the money (OTM) when using it now is worthless: a call with a strike above the stock price, or a put with one below it.
A simple example
A stock trades at $100.
| Option | Strike | Out of the money? | Why |
|---|---|---|---|
| Call | $110 | Yes | Buying at $110 is worse than the $100 market price |
| Call | $95 | No | Buying at $95 is $5 better than the market |
| Put | $90 | Yes | Selling at $90 is worse than the $100 market price |
| Put | $105 | No | Selling at $105 is $5 better than the market |
The $110 call costs $0.80. It has no built-in value (called intrinsic value). All $0.80 is time value: what traders will pay for the chance the stock passes $110 before expiry.
Per contract of 100 shares, that's $80.
What happens at expiry
If the stock is still below $110 on the last day, the call expires worthless. The buyer loses the whole $80. The seller keeps it.
For the call to break even at expiry, the stock needs to reach $110 + $0.80 = $110.80. A 10.8% rise from here. Check any strike in the options profit calculator.
Why it matters
OTM options are cheap because they need a big move. They also lose value fast as time runs out, which is Theta at work. Their Delta is low, so a $1 stock move changes them only a little — until it doesn't.
The Options chain often shades In the money strikes, so the unshaded ones are OTM.
A common mistake
Buying far OTM options because they're cheap. A low price isn't the same as low risk. Most of these expire worthless, and the buyer loses 100% of what they paid.
Ask: how far does the stock need to move, by when? If that's a bigger move than it usually makes, the cheap price is telling you something.
See options trading basics for how calls and puts work.
Questions
Can an out-of-the-money option still make money?
Yes. Its price can rise before expiry if the stock moves toward the strike or volatility rises. At expiry, it only has value if it's in the money.
What happens to OTM options at expiration?
They expire worthless. Nothing is bought or sold.
Is OTM the same as "far OTM"?
"Far OTM" just means the strike is a long way from the stock price, so the option is cheaper and less likely to pay off.
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