What does “OTM” mean?

Traders refer to options as being OTM, but what does it mean?

Definition: OTM (Out of the Money)

OTM is an abbreviation for out of the money. It is used to describe an option contract that only has extrinsic value.

Origin

The abbreviation is popular in online investing forums and in traders lingo. Since it is related to options contracts, the phrase was coined when options trading began.

A call option contract is considered to be OTM when the underlying share price is below the strike price. The opposite of out of the money is in the money or ITM.

A put option contract is considered to be OTM when the underlying share price is above the strike price.

OTM options are popular in online investing forums because they are less expensive than ITM (In the money) options. This is because in the money options have intrinsic value and out of the money options are close to having intrinsic value. This is what makes them so appealing to investors.

If an investor purchases out of the money calls they typically expect the underlying share price to go up over time or before the date of expiry. Conversely, if an investor purchases out of the money puts they are betting on the underlying share price to go down.

Options contracts are bets on the direction that a stock will go before a certain price is reached. Calls bet on the price going up and puts bet on the price going down.

Subreddits like Wall Street Bets are all about options trading. The reason that options are more appealing than buying shares is that each option contract controls 100 shares. Because of this, call option contracts have the potential for big tendies if the strike price is hit or exceeded. Put option contracts have the potential for big tendies if the strike price is hit or below.

The stock market is sometimes viewed as a casino, and options are the best way to make bets and potentially win big.

Examples

”Broke student here, who made 90k by buying NOK OTM calls.”

“Started with 2k worth of OTM calls that instantly became ITM!”

“OTM calls are dirt cheap on XYZ right now!”

OTM or out of the money calls are betting big that a share price will rise.

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