Out-of-the-money

Out-of-the-money, often abbreviated OTM, describes an options contract that currently has no intrinsic value — meaning it would be worthless if it expired right now. An option gives its holder the right, but not the obligation, to buy (a call) or sell (a put) a stock at a fixed price, called the strike price, by a certain date. Whether an option is out-of-the-money depends on where that strike sits relative to the stock's current market price.

For a call option, which gives the right to buy the stock, "out-of-the-money" means the strike price is above the current market price. Nobody would pay the strike to buy shares that cost less on the open market, so exercising the option right now would make no sense. For a put option, which gives the right to sell the stock, it's the reverse: the strike price is below the current market price, so selling at the strike would fetch less than just selling in the market.

The nuance that trips people up is that out-of-the-money doesn't mean worthless as a tradeable contract, only that it has no intrinsic value today. An OTM option can still have value because of time value — the chance that the stock moves far enough before expiration to make the option worth exercising. That's why far-OTM options are cheap but not free, and why their price decays sharply as expiration nears if the stock hasn't moved in their favor. This is also why OTM options are described relative to two siblings: in-the-money (intrinsic value exists) and at-the-money (strike roughly equal to market price).

Moneyness — whether an option is OTM, at-the-money, or in-the-money — changes constantly as the underlying stock price moves, so an option can drift between these states throughout the trading day without anything happening to the contract itself.