Out of the money

1. What is the meaning of out of the money?
2. What does in or out of the money mean?
3. What is OTM ATM and ITM?
4. Why buy OTM calls?

What is the meaning of out of the money?

Out of the money is also known as OTM, meaning an option has no intrinsic value, only extrinsic value. A call option is OTM if the underlying price is trading below the strike price of the call.

What does in or out of the money mean?

Key Takeaways

Calls are in the money when the security's price is above the strike price, and out of the money when the security's price is below the strike price. Put options are in the money when the security's price is below the strike price, and out of the money when the security's price is above the strike price.

What is OTM ATM and ITM?

Any option that has an intrinsic value is classified as 'In the Money' (ITM) option. Any option that does not have an intrinsic value is classified as 'Out of the Money' (OTM) option. If the strike price is almost equal to spot price, then the option is considered as 'At the money' (ATM) option.

Why buy OTM calls?

Out-of-the-money (OTM) options are cheaper than other options since they need the stock to move significantly to become profitable. The further out of the money an option is, the cheaper it is because it becomes less likely that underlying will reach the distant strike price.