What It Means
An option is out of the money (OTM) when it has no intrinsic value right now, meaning exercising it immediately would make no sense. A call is OTM when the underlying's price is below the strike; a put is OTM when the price is above the strike. This sits opposite in the money (ITM), where the option does have intrinsic value, and at the money (ATM), where the strike and price are roughly equal.
How It Works
Being OTM doesn't mean an option is worthless while it's still trading. It can still carry time value, since there's a chance the price moves enough before expiry to bring it in the money. What it does mean is that its entire premium is time value, with nothing backing it from intrinsic value. If it's still OTM at expiry, it settles at zero.
Example
Nifty is at ₹24,800. A ₹25,200 call is OTM (the price would need to rise ₹400 to have any intrinsic value), and a ₹24,400 put is also OTM (the price would need to fall ₹400). Both can still trade at a premium, ₹40 or ₹60 a share, say, purely on the chance that happens before expiry.
Warning
An OTM option trading at a premium isn't a signal that it's "worth something" the way a stock's price is. That entire premium is time value, and it decays to zero if the option is still OTM at expiry.
Related Terms
- Call Option — OTM when price is below the strike
- Put Option — OTM when price is above the strike
- Strike Price — the reference point OTM is measured against