What Is "Out-of-the-Money" (OTM) in the Context of a Protective Put? ▴ Learn

What Is “Out-of-the-Money” (OTM) in the Context of a Protective Put?

An option is Out-of-the-Money (OTM) when it has no intrinsic value. For a put option, this occurs when the strike price is lower than the current market price of the underlying asset.

In a collar, the protective put is typically OTM because the investor wants protection only if the price falls significantly, minimizing the cost of the insurance. The further OTM, the cheaper the option.

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Explain the Concept of Being “Out of the Money” for a Put Option

What Does It Mean for an Option to Be “Out-of-the-Money” (OTM)?