OTM

Out of the money (OTM) describes an option that has no intrinsic value, it would be worthless if exercised right now at the current stock price.

For a call: OTM when the strike price is above the current stock price. For a put: OTM when the strike price is below the current stock price.

OTM options consist entirely of extrinsic (time) value. They have a lower probability of expiring in the money, but offer higher leverage per dollar spent if the stock makes a large move in the right direction.

Why most income strategies use OTM options: Selling OTM options gives you a buffer, the stock has to move past your strike before you face a loss. The further OTM your short strike, the higher the probability of keeping the full premium, but the less premium you collect.

Delta as a moneyness guide: OTM options have delta below 0.50. A delta of 0.20 means the option is moderately OTM with roughly a 20% chance of expiring ITM. A delta of 0.05 is deep OTM with very little chance of expiring in the money.

Example: AAPL is at $190. The $200 call is OTM, AAPL needs to rise above $200 before this call has intrinsic value. The $180 put is OTM, AAPL needs to fall below $180. Both are pure extrinsic value.

Related terms: ITM, ATM, moneyness, intrinsic value, delta, premium

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