An out-of-the-money (OTM) option is an expression used to describe a contract with no intrinsic value.
For a call option, the option is OTM if the option’s strike price is higher than the current market price of the underlying asset. For a put option, the option is OTM if the strike price of the option is lower than the underlying asset’s market price.
Example OTM for a Call Option
John Smith wants to buy call options on Company ABC. The call option has a strike price of $50 and expires in 6 months. The current market price of Company ABC is $42 per share.
After John buys the call options, he has no reason to exercise them and purchase the shares at $50 per share because the current market price is $42 per share, which is below the strike price. John would be better served just buying the shares on the open market. The call options John just purchased are out-of-the-money.