In Derivatives, What Is the Significance of the "Out-of-the-Money" (OTM) State? ▴ Learn

In Derivatives, What Is the Significance of the “Out-of-the-Money” (OTM) State?

An option is Out-of-the-Money (OTM) when exercising it would not be profitable. For a Call, the strike is above the current price; for a Put, the strike is below the current price.

OTM options have zero intrinsic value and consist entirely of time value. They are generally cheaper than ITM or ATM options but carry a higher risk of expiring worthless.

Traders often buy OTM options for leverage or sell them to collect premium.

Does an Out-of-the-Money Option Have Intrinsic Value?

What Is the Intrinsic Value of an Out-of-the-Money Put Option?

What Is Meant by an Option Being ‘In-the-Money’ (ITM), ‘At-the-Money’ (ATM), or ‘Out-of-the-Money’ (OTM)?

Can an Option Have Extrinsic Value but Zero Intrinsic Value?