Out of the money, which is also known as OTM, is a term used for an option contract that only contains extrinsic value. This means, it’s an option contract which has no intrinsic value, only extrinsic value.
We have two types of Out of the money options;
- OTM call option
- OTM put option
In an OTM call option, the strike price of the out of the money contract should be higher than the market price of the underlying asset. In other words, a call option will be considered as OTM when the underlying price is trading below the strike price of the call.
On the other hand, in an OTM put option, the strike price should be lower than the market price of the underlying asset. This means, a put option will be considered as OTM if the underlying price is above the put’s strike price.
Due to this reason, OTM options are less expensive than ITM or ATM options.
Here is a link to have a look at the Nifty’s option chain. Contracts marked in white color are OTMs. Gray colored are ITMs.
An option can also be At The Money (ATM) or In the Money (ITM).
