OUT OF THE MONEY STOCK OPTIONS (OTM) - Options Trading Basics

Out of the money stock Options are those which have no intrinsic value. Thus a Call Option is out of the money (OTM) if its strike price is greater than the current price of the underlying. A Put Option is out of the Money (OTM) if its strike price is lower than the current market price of the underlying.

There are three types of moneyness notions related to Options that an options trader must be aware of. In-the-money (ITM), At-the-money (ATM) and Out-of-the-money (OTM). If you are new to Options Trading, you might be interested in first reading my post on Options Examples.

The Intrinsic Value of an Option, is the value which an options trader would get if she were to exercise the option at that moment. Thus for a Call Option whose strike price is greater than the value of the underlying intrinsic value is zero. Otherwise the intrinsic value of a Call Option is defined to be

Intrinsic value of Call Option = Current Price of the underlying - Strike Price

For a Put Option whose strike price is lower than the current price of the underlying, the intrinsic value is zero. Otherwise Intrinsic Value of a Put Option is defined to be

Intrinsic value of Put Option = Strike Price - Current Price of the underlying

The remaining component of the option price is called the Time Premium or Extrinsic value.

Time Premium of an Option = Option Price - Intrinsic Value.

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