# OTM Meaning: What Out-of-the-Money Means for Options Traders

Published: 2026-04-05
Author: Warren Team
URL: https://www.heywarren.com/blog/otm-meaning

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OTM stands for **Out-of-the-Money**, an options term describing an option that has no intrinsic value at its current [strike price](/blog/strike-prices) relative to the underlying asset's market price. A call option is OTM when the strike price is above the current stock price (the right to buy at $110 when the stock is at $100 has no immediate exercise value). A put option is OTM when the strike price is below the current stock price (the right to sell at $90 when the stock is at $100 has no exercise value). OTM options are cheaper than in-the-money (ITM) options and offer higher potential percentage returns, but they expire worthless if the underlying doesn't move enough. Understanding OTM, ITM, and ATM (at-the-money) is foundational to options trading and risk management.

## Options Moneyness: OTM, ITM, and ATM

"Moneyness" describes the relationship between an option's strike price and the current price of the underlying:

![Three moneyness states for a call option with stock at $100, ITM (strike below price), ATM (strike at price), OTM (strike above price).](data:image/svg+xml,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20viewBox%3D%220%200%20600%20211%22%20width%3D%22600%22%20height%3D%22211%22%20role%3D%22img%22%3E%3Ctitle%3EHierarchy%3C%2Ftitle%3E%3Crect%20width%3D%22100%25%22%20height%3D%22100%25%22%20fill%3D%22%23f8fafc%22%2F%3E%3Crect%20x%3D%22220%22%20y%3D%2220%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22%232563eb%22%2F%3E%3Ctext%20x%3D%22300%22%20y%3D%2254%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22700%22%20fill%3D%22white%22%3EStock%20at%20%24100%3C%2Ftext%3E%3Cpath%20d%3D%22M%20300%2078%20L%20300%20105.5%20L%20120%20105.5%20L%20120%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%2240%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22120%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EITM%20Call%3C%2Ftext%3E%3Ctext%20x%3D%22120%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3EStrike%20%26lt%3B%20%24100%3C%2Ftext%3E%3Cpath%20d%3D%22M%20300%2078%20L%20300%20105.5%20L%20300%20105.5%20L%20300%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%22220%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22300%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EATM%20Call%3C%2Ftext%3E%3Ctext%20x%3D%22300%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3EStrike%20%E2%89%88%20%24100%3C%2Ftext%3E%3Cpath%20d%3D%22M%20300%2078%20L%20300%20105.5%20L%20480%20105.5%20L%20480%20133%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%20fill%3D%22none%22%2F%3E%3Crect%20x%3D%22400%22%20y%3D%22133%22%20width%3D%22160%22%20height%3D%2258%22%20rx%3D%228%22%20fill%3D%22white%22%20stroke%3D%22%230891b2%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22480%22%20y%3D%22158%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2213%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EOTM%20Call%3C%2Ftext%3E%3Ctext%20x%3D%22480%22%20y%3D%22176%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3EStrike%20%26gt%3B%20%24100%3C%2Ftext%3E%3C%2Fsvg%3E)

*Three moneyness states for a call option with stock at $100, ITM (strike below price), ATM (strike at price), OTM (strike above price).*

| Category | Call Option | Put Option |
|---|---|---|
| In-the-Money (ITM) | Strike < Current Price | Strike > Current Price |
| At-the-Money (ATM) | Strike ≈ Current Price | Strike ≈ Current Price |
| Out-of-the-Money (OTM) | Strike > Current Price | Strike < Current Price |

**Example** (stock trading at $100):

| Strike | Call Option | Put Option |
|---|---|---|
| $85 | Deep ITM ($15 intrinsic) | Deep OTM ($0 intrinsic) |
| $95 | ITM ($5 intrinsic) | OTM ($0 intrinsic) |
| $100 | ATM ($0 intrinsic) | ATM ($0 intrinsic) |
| $105 | OTM ($0 intrinsic) | ITM ($5 intrinsic) |
| $115 | Deep OTM ($0 intrinsic) | Deep ITM ($15 intrinsic) |

## OTM Option Value: Time Value Only

An OTM option has **zero intrinsic value**, its entire premium is **time value** (also called extrinsic value):

- **Intrinsic value**: The immediate exercise value, max(0, S − K) for calls; max(0, K − S) for puts
- **Time value**: The additional premium above intrinsic value, reflecting probability of the option moving into the money before expiration

**OTM option premium breakdown**:
- $100 stock, $110 call (10% OTM), 30 days to expiration, premium = $1.50
- Intrinsic value: $0 (stock is $10 below strike)
- Time value: $1.50 (entirely time value)

As expiration approaches, time value decays, this is **theta decay**. OTM options experience accelerating theta decay as expiration nears. An OTM option that never moves into the money expires **completely worthless**.

## Why Trade OTM Options?

**Buying OTM options (speculative/directional)**:

*Advantages*:
- Cheaper premium = lower dollar cost
- Higher percentage returns if the underlying makes a large move
- Defined risk (maximum loss = premium paid)
- Leverage: control 100 shares for a small premium

*Disadvantages*:
- Higher probability of total loss (expire worthless)
- Requires a large move in the underlying
- Time decay works against the buyer

**Example**:
- Buy $100 stock at-the-money call for $5 premium
- Buy $110 OTM call for $1.50 premium
- If stock moves to $115: ATM call gains $15 (300% return); OTM call gains $3.50 (233% return)
- If stock moves to $108: ATM call gains $8 (160%); OTM call expires worthless (−100%)

**Selling OTM options (income strategy)**:

Option sellers benefit from OTM options expiring worthless:
- **Covered calls**: Sell OTM calls against stock you own, collect premium; cap upside above strike
- **Cash-secured puts**: Sell OTM puts to generate income; risk is being assigned stock at the strike
- **Iron condors / spreads**: Sell OTM calls AND puts simultaneously to profit from the underlying staying within a range

## Delta: Probability Proxy for OTM Options

**Delta** measures how much an option's price changes per $1 move in the underlying. For OTM options:
- OTM calls: Delta between 0 and 0.50 (less than ATM)
- OTM puts: Delta between −0.50 and 0
- Deep OTM options: Delta approaches 0

![Delta falls as calls move further OTM, a rough probability proxy showing decreasing chance of expiring in-the-money.](data:image/svg+xml,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20viewBox%3D%220%200%20800%20149%22%20width%3D%22800%22%20height%3D%22149%22%20role%3D%22img%22%3E%3Ctitle%3ETimeline%3C%2Ftitle%3E%3Crect%20width%3D%22100%25%22%20height%3D%22100%25%22%20fill%3D%22%23f8fafc%22%2F%3E%3Cline%20x1%3D%22137.5%22%20y1%3D%2255%22%20x2%3D%22662.5%22%20y2%3D%2255%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%223%22%2F%3E%3Ccircle%20cx%3D%22137.5%22%20cy%3D%2255%22%20r%3D%2224%22%20fill%3D%22white%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22137.5%22%20y%3D%2260%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2215%22%20font-weight%3D%22700%22%20fill%3D%22%230f172a%22%3E1%3C%2Ftext%3E%3Ctext%20x%3D%22137.5%22%20y%3D%22101%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2212%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3E%24105%20Call%3C%2Ftext%3E%3Ctext%20x%3D%22137.5%22%20y%3D%22119%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3E%CE%94%20%E2%89%88%200.38%3C%2Ftext%3E%3Ccircle%20cx%3D%22312.5%22%20cy%3D%2255%22%20r%3D%2224%22%20fill%3D%22white%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22312.5%22%20y%3D%2260%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2215%22%20font-weight%3D%22700%22%20fill%3D%22%230f172a%22%3E2%3C%2Ftext%3E%3Ctext%20x%3D%22312.5%22%20y%3D%22101%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2212%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3E%24110%20Call%3C%2Ftext%3E%3Ctext%20x%3D%22312.5%22%20y%3D%22119%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3E%CE%94%20%E2%89%88%200.22%3C%2Ftext%3E%3Ccircle%20cx%3D%22487.5%22%20cy%3D%2255%22%20r%3D%2224%22%20fill%3D%22white%22%20stroke%3D%22%23cbd5e1%22%20stroke-width%3D%222%22%2F%3E%3Ctext%20x%3D%22487.5%22%20y%3D%2260%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2215%22%20font-weight%3D%22700%22%20fill%3D%22%230f172a%22%3E3%3C%2Ftext%3E%3Ctext%20x%3D%22487.5%22%20y%3D%22101%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2212%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3E%24115%20Call%3C%2Ftext%3E%3Ctext%20x%3D%22487.5%22%20y%3D%22119%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3E%CE%94%20%E2%89%88%200.12%3C%2Ftext%3E%3Ccircle%20cx%3D%22662.5%22%20cy%3D%2255%22%20r%3D%2224%22%20fill%3D%22%232563eb%22%20stroke%3D%22%232563eb%22%20stroke-width%3D%223%22%2F%3E%3Ctext%20x%3D%22662.5%22%20y%3D%2260%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2215%22%20font-weight%3D%22700%22%20fill%3D%22white%22%3E4%3C%2Ftext%3E%3Ctext%20x%3D%22662.5%22%20y%3D%22101%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2212%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3E%24120%20Call%3C%2Ftext%3E%3Ctext%20x%3D%22662.5%22%20y%3D%22119%22%20text-anchor%3D%22middle%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2210%22%20fill%3D%22%2364748b%22%3E%CE%94%20%E2%89%88%200.06%3C%2Ftext%3E%3C%2Fsvg%3E)

*Delta falls as calls move further OTM, a rough probability proxy showing decreasing chance of expiring in-the-money.*

**Delta as probability approximation**: An OTM call with delta 0.25 has approximately a 25% probability of expiring ITM. This gives traders a quick way to assess OTM option risk/reward.

**Options chain example** ($100 stock):
- $105 call (5% OTM): delta ~0.38, premium ~$2.80
- $110 call (10% OTM): delta ~0.22, premium ~$1.50
- $115 call (15% OTM): delta ~0.12, premium ~$0.80
- $120 call (20% OTM): delta ~0.06, premium ~$0.40

Further OTM → lower delta → lower probability → lower premium → higher potential percentage return if exercise.

## OTM vs. ITM: Choosing the Right Strike

| Consideration | OTM Option | ITM Option |
|---|---|---|
| Premium | Lower | Higher |
| Probability of profit | Lower | Higher |
| Leverage/% return | Higher | Lower |
| Breakeven | Further from current price | Closer to current price |
| Theta decay sensitivity | Higher | Lower |
| Directional bet | Needs larger move | Needs smaller move |

![OTM call premium ($1.50) vs ATM call premium ($5.00) on a $100 stock, OTM costs 70% less but requires a larger move to profit.](data:image/svg+xml,%3Csvg%20xmlns%3D%22http%3A%2F%2Fwww.w3.org%2F2000%2Fsvg%22%20viewBox%3D%220%200%20800%20210%22%20width%3D%22800%22%20height%3D%22210%22%20role%3D%22img%22%3E%3Ctitle%3EComparison%3C%2Ftitle%3E%3Crect%20width%3D%22100%25%22%20height%3D%22100%25%22%20fill%3D%22%23f8fafc%22%2F%3E%3Ctext%20x%3D%22230%22%20y%3D%2257.5%22%20text-anchor%3D%22end%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EATM%20Call%3C%2Ftext%3E%3Crect%20x%3D%22240%22%20y%3D%2225%22%20width%3D%22450%22%20height%3D%2255%22%20rx%3D%226%22%20fill%3D%22%232563eb%22%2F%3E%3Ctext%20x%3D%22702%22%20y%3D%2257.5%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22700%22%20fill%3D%22%232563eb%22%3E%245%3C%2Ftext%3E%3Ctext%20x%3D%22230%22%20y%3D%22152.5%22%20text-anchor%3D%22end%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22600%22%20fill%3D%22%230f172a%22%3EOTM%20Call%20%28%24110%29%3C%2Ftext%3E%3Crect%20x%3D%22240%22%20y%3D%22120%22%20width%3D%22135%22%20height%3D%2255%22%20rx%3D%226%22%20fill%3D%22%237c3aed%22%2F%3E%3Ctext%20x%3D%22387%22%20y%3D%22152.5%22%20font-family%3D%22system-ui%2C-apple-system%2Csans-serif%22%20font-size%3D%2214%22%20font-weight%3D%22700%22%20fill%3D%22%237c3aed%22%3E%241.5%3C%2Ftext%3E%3C%2Fsvg%3E)

*OTM call premium ($1.50) vs ATM call premium ($5.00) on a $100 stock, OTM costs 70% less but requires a larger move to profit.*

Choose OTM when you expect a large move and want maximum leverage. Choose ITM when you want higher probability and are more conservative about the move size.

## Authoritative Sources

For deeper background and primary-source data on this topic, the following authoritative sources are useful starting points:

- [SEC, Securities and Exchange Commission](https://www.sec.gov/)
- [FINRA](https://www.finra.org/)

## Conclusion

OTM (Out-of-the-Money) options have no intrinsic value, their premium is entirely time value, and they expire worthless if the underlying doesn't reach the strike price. OTM options are cheaper, offer higher potential percentage returns, and carry higher probability of total loss than ITM options. Buyers use OTM options for directional leverage; sellers use them to collect premium that they expect will decay to zero. Delta provides a rough probability measure for OTM options. For related options and derivatives concepts, see our guides on [fixed rate swap](/blog/fixed-rate-swap) and [asset-backed securities](/blog/asset-backed-securities-abs).

Warren at [heywarren.com](https://heywarren.com) helps options traders, investors, and derivatives users understand option moneyness, pricing concepts, and how to select appropriate strikes for different risk/return objectives.

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## Related Reading

**More from Warren**:
- [Fixed Rate Swap: How Interest Rate Swaps Work and Who Uses Them](/blog/fixed-rate-swap)
- [Call and Put Parity: What It Is and Why It Matters](/blog/call-and-put-parity)
- [Rising Wedge Pattern: What It Is and How Traders Use It](/blog/rising-wedge-pattern)

**Authoritative sources**:
- [CBOE, Options Education](https://www.cboe.com/education/)
- [OCC, Options Characteristics and Risks](https://www.theocc.com/Company-Information/Documents-and-Archives/Options-Disclosure-Document)
- [CFA Institute, Derivatives](https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/basics-derivative-pricing-valuation)