MENU
EDU Articles

Learn about investing, trading, retirement, banking, personal finance and more.

Ad is loading...
Help CenterFree ProductsPremium Products
IntroductionMarket AbbreviationsStock Market StatisticsThinking about Your Financial FutureSearch for AdvisorsFinancial CalculatorsFinancial MediaFederal Agencies and Programs
Investment PortfoliosModern Portfolio TheoriesInvestment StrategyPractical Portfolio Management InfoDiversificationRatingsActivities AbroadTrading Markets
Investment Terminology and InstrumentsBasicsInvestment TerminologyTradingBondsMutual FundsExchange Traded Funds (ETF)StocksAnnuities
Technical Analysis and TradingAnalysis BasicsTechnical IndicatorsTrading ModelsPatternsTrading OptionsTrading ForexTrading CommoditiesSpeculative Investments
Cryptocurrencies and BlockchainBlockchainBitcoinEthereumLitecoinRippleTaxes and Regulation
RetirementSocial Security BenefitsLong-Term Care InsuranceGeneral Retirement InfoHealth InsuranceMedicare and MedicaidLife InsuranceWills and Trusts
Retirement Accounts401(k) and 403(b) PlansIndividual Retirement Accounts (IRA)SEP and SIMPLE IRAsKeogh PlansMoney Purchase/Profit Sharing PlansSelf-Employed 401(k)s and 457sPension Plan RulesCash-Balance PlansThrift Savings Plans and 529 Plans and ESA
Personal FinancePersonal BankingPersonal DebtHome RelatedTax FormsSmall BusinessIncomeInvestmentsIRS Rules and PublicationsPersonal LifeMortgage
Corporate BasicsBasicsCorporate StructureCorporate FundamentalsCorporate DebtRisksEconomicsCorporate AccountingDividendsEarnings

What does out of the money (OTM) mean?

If an option on an underlying security does not have a strike price giving the option holder the ability to exercise the option for a profit (based on the current market price of the underlying security) that option is “Out of The Money.”

An option is Out Of The Money (OTM) if it isn’t profitable for the option holder to exercise it. Options have a strike price that contractually defines the amount which will be paid for the underlying security if the option is exercised.

Recall: a call option gives the option holder the right to buy the underlying security at the strike price, and a put allows the option holder to sell the underlying security at the strike price. That would mean if the strike price of a call is still higher than the market price, you wouldn't want to buy the underlying security at the higher strike price, so this option is Out Of The Money.

For a put, it's out of the money if the opposite situation exists: the strike price is lower than the market price, so it wouldn't make sense to exercise the option and sell the underlying security at the lower-than-market strike price. When an option's strike price is the same as the market price of the underlying security, it is "At The Money," and when the strike price makes the option profitable to exercise, the option is "In The Money."

Ad is loading...