GLOSSARY // Options
Out of the Money (OTM)
An out-of-the-money option has zero intrinsic value: a call with its strike above the stock price, or a put with its strike below it. Its entire premium is extrinsic value, and it expires worthless unless the stock crosses the strike.
OTM options are cheap in dollars and expensive in odds. A far OTM call can return several hundred percent on a big move, but most expire at zero — the low price is the market's estimate of a low probability. Deltas below roughly 0.30 flag the territory, and the decay accelerates as expiration nears.
With a stock at $50, the 55 call trades at $0.60 and the 45 put at $0.55 — both out of the money, both 100% extrinsic value. The 55 call needs the stock above $55.60 at expiration to profit, an 11.2% rally. Anything less and the $60 per contract is gone in full.
Related terms
Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.