Out-of-the-Money (OTM) refers to an option that currently has no intrinsic value because the market price of the underlying asset is not favourable compared to the strike price. For a call option, it is OTM when the market price is below the strike price. For a put option, it is OTM when the market price is above the strike price.
- Out-of-the-Money Call: When the underlying price is ↓ strike price.
- Out-of-the-Money Put: When the underlying price is ↑ strike price.
- No Intrinsic Value: OTM options have only time value, no real value if exercised.
- Lower Premium: OTM options are cheaper compared to ITM options.
- Risk of Expiry: OTM options may expire worthless if the market doesn’t move favourably.
Example:
- Call: NIFTY at 17,700 → 18000 Call is OTM (market below strike).
- Put: NIFTY at 18,300 → 18000 Put is OTM (market above strike).