11.23What is OTM (Out of the Money)?
1What is it?
An option is out of the money if it has no intrinsic value: a call with strike above spot, or a put with strike below spot.
2Why does it exist?
OTM options are cheap, which tempts beginners, but most expire worthless.
3Stock market example
Nifty at 25,000: the 25,500 call and 24,500 put are OTM. Their premium is pure time value.
4Quick revision
- No intrinsic value.
- Cheap but often expire worthless.
5Knowledge check
Q1. Spot 25,000, 25,300 call: ITM/ATM/OTM?Show answer
OTM.
Q2. Why are OTM options cheap?Show answer
They have only time value and low probability of payoff.
Q3. What happens to most far-OTM options at expiry?Show answer
They expire worthless.