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What Is an Out-of-the-Money (OTM) Option?

By OptionsPriceCalculator Team · Published October 20, 2026 · Updated October 20, 2026

An option is out-of-the-money (OTM) when exercising it right now would be worthless. For a call, that means the strike price sits above the stock’s current price - you’d be buying shares for more than you could just pay in the market. For a put, it’s the reverse: the strike sits below the current price, so selling at the strike would mean selling for less than the stock is already worth.

The Two-Second Test

  • OTM call: stock price < strike price
  • OTM put: stock price > strike price

Nobody would exercise an OTM option today - there’s nothing to gain by doing so. That’s the whole definition: zero intrinsic value, this instant.

What You’re Actually Buying

Since an OTM option has no intrinsic value, its entire premium is time value - a bet that the stock moves far enough, fast enough, for the option to become in-the-money before expiration. That’s why OTM options are cheap relative to ITM ones, and why they expire worthless far more often than new traders expect: most of the time, the stock simply doesn’t move enough.

That combination - low cost, long odds, uncapped payout if it works - is exactly what makes OTM options attractive for small directional bets and dangerous as a core strategy. A string of OTM calls that each cost “only” $50 can still wipe out an account one expiration at a time.

A Quick Example

Say AAPL trades at $340. A $350 call is OTM by $10 - the stock needs to rise past $350 before exercising it would be worth anything. Every cent of that call’s premium right now is time value, priced on the chance AAPL gets there before expiration.

The same logic flips for puts: a $330 put on that $340 stock is OTM, because selling at $330 would mean giving up $10 of value compared to just selling in the market. A $350 put, by contrast, would be ITM.

Why OTM Options Decay Faster

Because an OTM option’s value is 100% time value, it has nothing else propping up its price. As expiration approaches and the stock still hasn’t reached the strike, that time value erodes toward zero - and on expiration day, an OTM option is worth exactly nothing. This is one reason OTM options are a common building block for defined-risk spreads: selling them collects a premium that’s pure time decay working in your favor.

Where this is used

See how an option’s value shrinks as it stays OTM into expiration: open the options calculator and move the expiration date closer with the strike held fixed.

This article is for educational purposes only and does not constitute financial, investment, legal or tax advice. Options trading involves substantial risk and is not suitable for all investors.