Out-of-the-Money (OTM)
An option is out of the money when exercising it would not have positive intrinsic value at the current underlying price.
✦ Key Insight
It explains why many options can still trade for time value even with no intrinsic value.
✕ Common Misconceptions
OTM does not mean worthless before expiration because time and volatility can still create premium value.
Detailed Explanation
In Practice
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Call Option
A call option gives its holder the right, but not the obligation, to buy an underlying asset at a specified strike price before or at expiration, depending on the contract style.
Put Option
A put option gives its holder the right, but not the obligation, to sell an underlying asset at a specified strike price before or at expiration, depending on contract style.
Strike Price
The strike price is the predetermined price at which an option can be exercised according to its contract terms.
Option Premium
Option premium is the price paid by an option buyer and received by an option seller for the contract.
Moneyness
Moneyness describes an option's strike price relative to the current underlying price.