Out of the Money Meaning: Call & Put Options Examples

What does out-of-the-money (OTM) mean?

"out-of-the-money" (OTM) is a term used to describe an option that has zero intrinsic value. As such, any and all value in an out-of-the-money (OTM) option is considered extrinsic value.

In general, the term “moneyness” refers to the relationship between the current price of the underlying asset and the strike price of the option. Moneyness is typically categorized in three different ways, in-the-money (ITM), at-the-money (ATM) or out-of-the-money (OTM).

A call option is considered OTM when the underlying asset's current market price is lower than the option's strike price. Exercising the option in this situation wouldn't be profitable because you'd be buying the asset for more than its current market value.

A put option is OTM when the underlying asset's current market price is higher than the option's strike price. Exercising the option wouldn't be profitable because you'd be selling the asset for less than its current market value.

For OTM options, the premium (or value) is composed entirely of time value and other external factors, because OTM options have zero intrinsic value. 

Out-of-the-money call options

A call option is considered out-of-the-money (OTM) when the underlying asset's current market price is lower than the option's strike price. Exercising the option in this situation wouldn't be profitable because you'd be buying the asset for more than its current market value.

Example: If you have a call option for Apple stock with a strike price of $150, and the current market price of Apple stock is $145, then the call option is OTM. 

Out-of-the-money put options

A put option is considered out-of-the-money (OTM) when the underlying asset's current market price is higher than the option's strike price. Exercising the option wouldn't be profitable because you'd be selling the asset for less than its current market value.

Example: If you have a put option for Apple stock with a strike price of $150, and the current market price of Apple stock is $155, then the put option is OTM.

Out-of-the-money examples

A call option is considered out-of-the-money (OTM) when the underlying asset's current market price is lower than the option's strike price. Exercising the option in this situation wouldn't be profitable because you'd be buying the asset for more than its current market value.

Example: If you have a call option for Apple stock with a strike price of $150, and the current market price of Apple stock is $145, then the call option is OTM. 

A put option is considered out-of-the-money (OTM) when the underlying asset's current market price is higher than the option's strike price. Exercising the option wouldn't be profitable because you'd be selling the asset for less than its current market value.

Example: If you have a put option for Apple stock with a strike price of $150, and the current market price of Apple stock is $155, then the put option is OTM.

Out-of-the-money (OTM) versus in-the-money (ITM)

Because moneyness relates to the value of an option, the two primary components of an option’s value - intrinsic and extrinsic value - provide further perspective on the concept of moneyness.

In the options world, intrinsic and extrinsic value represent the total value (aka price or premium) of an option. 

The intrinsic value of an in-the-money (ITM) option at expiration is the difference between the strike price and stock price. For expiring out-of-the-money (OTM) options, this value is zero.

Extrinsic is the term used for the value of an option beyond its intrinsic value. Stated differently, extrinsic value is the part of the option premium that is not intrinsic value. 

Taken all together, that means for a call option to be ITM, the current market price of the underlying asset must be higher than the option's strike price. And for a put option to be ITM, the current market price of the underlying asset must be lower than the option's strike price. 

On the other hand, a call option is considered out-of-the-money (OTM) when the underlying asset's current market price is lower than the option's strike price, whereas a put option is considered out-of-the-money (OTM) when the underlying asset's current market price is higher than the option's strike price. 

In the case of an OTM option, any market value in the option is considered extrinsic value. 

Out-of-the-money summed up

In the options universe, the term “moneyness” refers to the relationship between the current price of the underlying asset and the strike price of the option.

Moneyness is typically categorized in three different ways, in-the-money (ITM), at-the-money (ATM) or out-of-the-money (OTM).

A call option is considered OTM when the underlying asset's current market price is lower than the option's strike price. Exercising the option in this situation wouldn't be profitable because you'd be buying the asset for more than its current market value.

A put option is OTM when the underlying asset's current market price is higher than the option's strike price. Exercising the option wouldn't be profitable because you'd be selling the asset for less than its current market value.

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