Articles on Stock markets

News, Research and Analysis

Help Center
Introduction
Investment Portfolios
Investment Terminology and Instruments
Technical Analysis and TradingAnalysis BasicsTechnical IndicatorsTrading ModelsPatternsTrading OptionsTrading ForexTrading CommoditiesSpeculative Investments
Cryptocurrencies and Blockchain
Retirement
Retirement Accounts
Personal Finance
Corporate Basics
What does out of the money (OTM) mean?

What does out of the money (OTM) mean?

If an option on an underlying security does not have a strike price giving the option holder the ability to exercise the option for a profit (based on the current market price of the underlying security) that option is “Out of The Money.”

An option is Out Of The Money (OTM) if it isn’t profitable for the option holder to exercise it. Options have a strike price that contractually defines the amount which will be paid for the underlying security if the option is exercised.

Recall: a call option gives the option holder the right to buy the underlying security at the strike price, and a put allows the option holder to sell the underlying security at the strike price. That would mean if the strike price of a call is still higher than the market price, you wouldn't want to buy the underlying security at the higher strike price, so this option is Out Of The Money.

For a put, it's out of the money if the opposite situation exists: the strike price is lower than the market price, so it wouldn't make sense to exercise the option and sell the underlying security at the lower-than-market strike price. When an option's strike price is the same as the market price of the underlying security, it is "At The Money," and when the strike price makes the option profitable to exercise, the option is "In The Money."

Keywords: profit, security, call option, put option, strike price, derivative, Out of The Money (OTM), options,