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Glossary/Options & Derivatives/Out of the Money (OTM)
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Options & Derivatives
2 min readUpdated Apr 16, 2026

Out of the Money (OTM)

OTMout-of-the-money option

An option is out of the money when it has no intrinsic value: a call when the stock is below the strike, or a put when the stock is above the strike.

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Analysis from Apr 19, 2026

What Does Out of the Money Mean?

An option is out of the money (OTM) when it has no intrinsic value and would not be profitable to exercise at the current stock price. A call option is OTM when the stock price is below the strike price. A put option is OTM when the stock price is above the strike price. The entire premium of an OTM option consists of time value.

OTM options are the most frequently traded options because they offer the most leverage per dollar invested and are the building blocks of most income-generating strategies.

Why OTM Options Matter

OTM options play several critical roles in the options ecosystem:

  • Maximum leverage: OTM options offer the highest percentage returns when the underlying makes a large move. A 10-delta OTM call that costs $0.50 and finishes at $5.00 delivers a 900% return
  • Income generation: Selling OTM options is the most popular premium collection strategy. Covered calls, credit spreads, and iron condors all involve selling OTM options that expire worthless the majority of the time
  • Tail-risk hedging: OTM puts provide cheap protection against market crashes. Their low cost makes it feasible to maintain continuous portfolio insurance
  • Market structure: OTM options, especially OTM puts, drive the volatility surface. The pricing of OTM options reveals the market's probability distribution for extreme outcomes

OTM Option Behavior

OTM options have distinct behavioral characteristics:

  • Low delta: OTM calls have deltas between 0 and 0.50; OTM puts between 0 and -0.50. Small stock moves have limited impact on OTM option prices
  • High theta relative to premium: OTM options lose a larger percentage of their value to time decay each day compared to ITM options
  • High gamma potential: As an OTM option approaches the money (stock moves toward the strike), its delta increases rapidly (high gamma), creating accelerating gains if the move continues
  • Volatility sensitivity: OTM options are highly sensitive to changes in implied volatility (high vega relative to premium). A spike in IV can double the value of an OTM option even without a stock price change

The farther OTM an option is, the cheaper it is but the lower the probability of profit. There is no free lunch: cheap options are cheap for a reason. The edge in OTM trading comes from identifying situations where the market underprices the probability or magnitude of extreme moves.

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Frequently Asked Questions

▶Why would you buy an out-of-the-money option?
OTM options are cheaper than ITM or ATM options, offering maximum leverage for a given capital outlay. If you believe a stock at $100 will jump to $120, a $110 call might cost $2 versus $6 for a $100 call. If the stock reaches $120, the $110 call is worth $10 (400% return on $2) while the $100 call is worth $20 (233% return on $6). OTM options also serve as cheap tail-risk protection (buying OTM puts) or as income generation (selling OTM options that have a high probability of expiring worthless). The key risk is that OTM options expire worthless more often than not.
▶What percentage of OTM options expire worthless?
Studies show approximately 60-70% of options expire worthless or are closed before expiration for a loss. OTM options have even higher expiry rates, with far OTM options (5%+ away from the stock price) expiring worthless roughly 80-90% of the time for short-dated contracts. This statistic is often cited by options sellers as justification for premium-selling strategies. However, the 20-30% of the time that OTM options do pay off can produce returns large enough to make buying them profitable on a risk-adjusted basis, particularly for tail-risk hedging where the payoff in the winning scenarios is extreme.
▶How far out of the money should you go?
The optimal OTM distance depends on your strategy, time frame, and risk tolerance. For directional bets, 5-15% OTM (20-35 delta) offers a reasonable balance between cost and probability. For premium selling, 15-30% OTM (10-20 delta) provides high win rates. For tail-risk hedging, 20-40% OTM (5-10 delta) provides cheap insurance for extreme events. As a general rule, never buy OTM options where the stock must move more than twice the implied move to profit. If options price a 5% move, an option requiring a 12% move has extremely low probability even if it is cheap in absolute terms.
Related Terms
At the Money (ATM)DeltaIn the Money (ITM)Strike PriceTime Value (Options)

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