What Is the Definition of an “Out of the Money” (OTM) Option?

An option is "out of the money" (OTM) if exercising it immediately would result in a loss, meaning it has zero intrinsic value. For a call option, the underlying price is below the strike price.

For a put option, the underlying price is above the strike price. OTM options are purely composed of time value and are generally cheaper than ITM or ATM options.