Out of the money (OTM) refers to a scenario in trading where the current market price of an asset falls below its strike price. In this situation, the option has no intrinsic value, unlike in-the-money options.
Compared to in the money and at the money, this trading situation is less expensive because there is no intrinsic value here. Whereas at the money is close to having intrinsic value and in the money has intrinsic value.
Out of the Money in a nutshell
- Out of the Money (OTM) refers to options that have no intrinsic value.
- For call options, the strike price is higher than the current market price. Conversely, for put options, the strike price is lower than the market price.
- OTM options are cheaper compared to options that are in the money or at the money.
When should you choose a call option in an “Out Of The Money” situation?
In the “Out Of The Money” situation, you can opt for the call option when the strike price of a commodity is higher than its current market price. In this case, you can buy a stock at a better and higher price.
When should you choose a put option in an “Out Of The Money” situation?
On the flip side, you can opt for the put option in the “Out Of The Money” situation when the market price of a given commodity is higher than its strike price. In this situation, you can sell the stock at a lower value.
Examples: How to handle “Out of the Money” situations?
Call Option
Suppose you have a call option for a stock with a strike price of $60 per share. However, the current market price of the stock is only $50 per share. Here, since the stock price is lower than the strike price, the call option is OTM. It’s not beneficial to exercise the option now.
Put Option
Let’s take a put option on the same stock with a strike price of $50 per share. The current market price of the stock, however, is $70 per share. In this case, since the share price is higher than the strike price, the put option is OTM. The option would not generate any profits at the moment.
Why is trading “Out Of The Money” beneficial?
Trading Out Of The Money is beneficial because it is cheaper than the other two options. Also, it offers a higher percentage of gain. So, with a thorough understanding of “Out Of The Money”, you can carefully choose the put or call option.