The term describes the position of the strike price relative to the price of the underlying asset, and is used together with in the money and at the money. When the gap between the strike price and the price of the underlying asset is especially large, the option is called deep out of the money1.

Consider a hypothetical example in which the price of the underlying asset is 90 yen and there is a call with a strike price of 100 yen. The call is OTM. Exercising would mean buying at 100 yen something that sells for 90 yen in the market, which loses money. The buyer does not exercise, and the option is abandoned. A put works in the opposite direction: when the price of the underlying asset is 110 yen, a put with a strike price of 100 yen is OTM.

The loss of the buyer of an OTM option is limited to the premium paid2. Also, OTM describes the relation between the price of the underlying asset and the strike price at a given moment, so if the price of the underlying asset moves before expiry, an OTM option can become in the money.

Notes

  1. Japan Exchange Group, "アウト・オブ・ザ・マネー（OTM）（用語集）" (Out of the money (OTM), glossary) (in Japanese), the second paragraph. ↩

  2. Central Council for Financial Services Information, "3-4 オプション取引の損益" (3-4 Profit and loss of option trading) (in Japanese), the section "オプション取引の買い手の立場" (The position of the option buyer), which explains that the buyer's loss is limited to the premium. ↩