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An “Out of the Money” (OTM) option is one that has no intrinsic value. That means if it is exercised by the holder, they would receive nothing. If it is a call option it is considered out of the money if the price of the underlying asset is below the strike price of the option. And if it is a put option it is considered out of the money if the price of the underlying asset is higher than the strike price of the option.
Let’s say you are going to purchase a call option with a strike price of $102 for a stock that is currently trading at $100. If the stock remains below your $102 strike price until the expiration of the option then the option will expire out of the money. It means the option expires worthless and the buyer loses whatever they paid to purchase the option. The same can happen for a put option. If the stock is trading at $100 and you purchase a put option with a strike price of $97 you would lose your investment if the price of the stock is above $97 at the expiration of the contract because the option would expire out of the money and be worthless.
Well, having an out of the money option means you’ll lose the premium paid to buy the option, and losing money is never a good thing. However, it is better than if you lost the value of the underlying asset. That’s why options are often used by investors to hedge against adverse moves in existing investments.
Moneyness is a term used to describe the three states of intrinsic value in options. The moneyness of an option is determined by the underlying price of the asset and the strike price of the option. This relationship has a different effect on moneyness for puts and calls. There are three states of moneyness for options:
A call option is considered to be out of the money whenever the strike price is above the market price of the underlying asset. An out of the money call has no intrinsic value and exercising such an option is a waste of the trader’s time since the call represents the right to buy the underlying asset at the strike price, but for an OTM call that’s more expensive than simply purchasing the asset at the current market price. A put option is the opposite from a call option. In the case of a put it is out of the money when the strike price of the option is below the market price of the underlying asset. If the strike price were above the market price the put option would be in the money. Again, exercising a put that is out of the money makes no sense because it has no intrinsic value, and you would be selling the underlying asset for less than you could on the open market.
The difference between the strike price of the option and the current market price of the underlying asset does matter. If you have an option where the strike price is close to the market price of the underlying asset it is more valuable than when price is further away because it would take just a small move in the price for the option to move into the money. However, if the difference is quite large then the chance of the option moving into the money is very slight, giving the option a much smaller premium and different characteristics. This moneyness of options doesn’t only need to be considered in terms of ATM, ITM, and OTM. Instead it should be thought of as a scale, with options that are further from the mid-point of ATM having different characteristics.
When there is a large difference between the strike price and the price of the underlying asset the option is considered as a “Far OTM option”. In general, the characteristics of OTM options apply more as the current market price of the underlying asset moves further away from the strike price of the option.
In early 2020, some institutional investors bought OTM put options on major equity indices such as the S&P 500. These options were relatively cheap compared to ATM or ITM contracts, but when markets collapsed in March 2020, their value multiplied. This provided effective portfolio insurance at a fraction of the cost of more expensive hedges.
Lesson for traders: OTM puts can serve as a cost-efficient “safety net” during times of heightened uncertainty, though they require accurate timing to pay off.
During the GameStop and AMC rallies, many retail traders piled into OTM call options, often far from the current share price. Their aim was to capture leveraged upside at low cost. While some traders profited hugely when prices spiked, the majority of contracts expired worthless once volatility subsided.
Lesson for traders: OTM calls can deliver extraordinary returns, but the odds of success are low if the underlying doesn’t move dramatically.
Energy traders used OTM calls on crude oil to speculate on supply shocks. With geopolitical tensions driving spikes above $100/barrel, these options offered high-reward exposure without the capital requirements of futures contracts.
Lesson for traders: OTM options can be used across asset classes, not just equities—useful for commodities, forex, and indices when volatility is expected.
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Hedge funds and asset managers often use OTM put options as part of a tail-risk hedging strategy. These are sometimes called “disaster hedges”: cheap insurance that pays off significantly if a rare but severe market downturn occurs.
For example, funds may buy OTM puts on equity indices to protect multi-billion dollar portfolios, accepting that most of the time these options will expire worthless.
Institutions also exploit OTM calls in commodities or FX markets when expecting extreme price shifts, giving them a low-cost way to capture asymmetrical returns. Importantly, they integrate these trades into diversified strategies and size them modestly relative to overall risk.
Retail investors are often drawn to OTM options for the leverage and low upfront cost. Buying OTM calls on volatile stocks or cryptos, for instance, allows traders to control large notional exposures with a small premium.
However, many retail traders underestimate the high probability of expiry worthless, which makes OTM options closer to speculative “lottery tickets” unless used carefully.
Key Distinction
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Out-of-the-money options have no intrinsic value—only time value and volatility premium. This makes them cheaper than at-the-money (ATM) or in-the-money (ITM) options.
In practice, the further an option’s strike price is from the current market level, the lower its cost—but also the lower its probability of finishing in profit.
In forex, traders often use OTM calls or puts on pairs like EUR/USD or USD/JPY to speculate on sharp moves around central bank decisions.
In commodities such as oil or gold, OTM options are used both for speculation and hedging.
The appeal lies in low upfront cost and high potential payoff. A small premium can yield multiples in return if the market makes an outsized move. However, retail traders often overlook that most OTM options expire worthless—meaning disciplined risk management is essential.
AvaTrade provides access to OTM options in forex and commodities, enabling traders to combine risk management with speculative opportunities. Here are the most common ways our clients use them:
Professional traders deploy OTM options as “lottery ticket” trades, allocating a small percentage of capital to cheap options that can multiply in value if rare but extreme events occur.
Event-driven traders use OTM options to position for high-impact data releases—such as U.S. Nonfarm Payrolls or OPEC meetings—where volatility can push markets far enough to activate OTM strikes.
Discover how OTM options can fit your trading strategy. Open a demo account with AvaTrade and explore FX and commodity options risk-free.
While OTM options can be attractive for their low cost and high potential upside, traders must approach them with caution.
Most OTM options do not reach their strike price before expiry. Traders should size positions assuming a high likelihood of losing the full premium.
During periods of market stress, OTM options can become unusually expensive. Buying them without checking implied volatility may result in overpaying for protection or speculation.
Because OTM options require small premiums, traders often buy too many contracts. This magnifies risk and can lead to losses larger than intended.
An option costing only a few dollars or cents per contract may seem harmless, but repeated purchases can erode capital if not managed as part of a disciplined strategy.
Short-dated OTM options decay quickly. Traders looking for protection or longer-term speculation may need longer expiries to avoid excessive time decay.
Trade smarter with AvaTrade. Use our risk-management tools—including guaranteed stops and real-time volatility data—to manage your exposure when trading OTM options.
To avoid costly mistakes, traders should run through a quick checklist before committing to an OTM trade:
Am I using this for hedging or speculation?
– Hedgers aim to offset risk, speculators seek high-reward outcomes. Be clear about your purpose.
Is the implied volatility reasonable?
– Check whether the option is overpriced due to market stress or event risk.
Do I understand the expiry risk?
– Most OTM options expire worthless. Never risk more than you are comfortable losing.
Have I sized my position correctly?
– Keep exposure small relative to your total portfolio. Treat OTM options like insurance, not core holdings.
Is this aligned with my market outlook and time horizon?
– Short-dated OTM options decay fast. Longer-dated contracts may better match medium-term strategies.
OTM stands for Out of the Money. It refers to an option whose strike price is away from the current market level, meaning it has no intrinsic value.
They are cheaper than at-the-money options and offer high potential returns if the market moves significantly, making them useful for both hedging and speculation.
Yes. Most OTM options expire worthless, so they carry a high probability of total premium loss if the market doesn’t move enough.
Hedge funds often buy OTM puts as low-cost insurance against market crashes, while also using OTM calls to capture outsized moves in FX or commodities.
Yes. AvaTrade offers OTM options on major forex pairs and key commodities like oil and gold, allowing traders to hedge or speculate with flexible strategies.
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