Out-of-the-Money (OTM)
Out-of-the-Money (OTM) is a financial term used to describe an option contract that has no intrinsic value. This means that the option’s strike price is higher than the current market price of the underlying asset. In other words, the option is not in the money and the option buyer will not receive any money if the option is exercised. OTM options are generally cheaper than in-the-money options, as they have a lower probability of expiring in the money.
History of Out-of-the-Money (OTM)
Out-of-the-Money (OTM) options have been around since the early days of options trading. The concept of OTM options was first introduced in the early 1970s when the Chicago Board Options Exchange (CBOE) was established. Since then, OTM options have become an important part of the options trading landscape. OTM options are used by traders to speculate on the direction of the underlying asset, as well as to hedge against potential losses.
Comparison of In-the-Money and Out-of-the-Money Options
| Option Type | Strike Price | Intrinsic Value |
|---|---|---|
| In-the-Money | Below Market Price | Positive |
| Out-of-the-Money | Above Market Price | Zero |
Summary
Out-of-the-Money (OTM) options are options contracts that have no intrinsic value. This means that the option’s strike price is higher than the current market price of the underlying asset. OTM options are generally cheaper than in-the-Money options, as they have a lower probability of expiring in the money. For more information about OTM options, traders can visit websites such as Investopedia, The Options Industry Council, and The Motley Fool.
See Also
- In-the-Money (ITM)
- At-the-Money (ATM)
- Option Strike Price
- Option Premium
- Option Expiration Date
- Option Delta
- Option Gamma
- Option Vega
- Option Theta
- Option Rho
