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

An option is 'out-of-the-money' (OTM) if exercising it immediately would result in a loss. For a call option, OTM means the strike price is above the current market price.

For a put option, OTM means the strike price is below the current market price. OTM options have only extrinsic (time) value and no intrinsic value, making them cheaper and often used for speculation or as low-cost 'insurance' against extreme events like a crash.