What Is Out of the Money (OTM)?
“Out of the Money” (OTM) refers to an options status where the option holds no intrinsic value, only extrinsic (or time) value. This is a fundamental concept in options trading which oftentimes dictates the investor’s strategy and risk assessment.
Characteristics of OTM Options
An OTM call option’s strike price remains loftier than the current market price of the underlying asset, while conversely, an OTM put option’s strike price is submerged beneath the market price of the underlying asset. Loosely, the sky is the limit for a call, while a dive is the deplaning for a put—simply speaking, call options bet on stocks rising above their stratosphere (strike price) and put options wager on them tunneling below their nadir.
Delta and OTM
Options come equipped with something called “delta,” a Greek letter that dances around less than 0.50 for OTM options. This measure tells us how much the price of the option is expected to move per a one-dollar change in the underlying asset. A low delta in OTM options whispers the tale of less sensitivity to price changes in the asset; hence marking them as high flyers or deep divers in the option world.
Premiums: The Lighter Side of Investing
OTM options gel well with those preferring a more melody-driven investment – easier on the pockets with their lower premiums, offering a potentially symphonic crescendo if the market rings the bell at just the right note. Cheaper does not always equate to cheerful, however, as these options can end up like unread books on expiration day.
Strategic Use of OTM Options
In the game board of investment strategies, OTM options are the dark horses—less expensive, hence appealing to speculative trades who might be short on cash but rich in dreams. Traders might use OTM options for various scenarios like hedging risks or speculating for disproportionate gains relative to the investment. An OTM’s life journey begins dimly lit but potentially starring in a lucrative finale, should the stars (market movements) align.
Wise Words
Navigating the seas of OTM options requires a compass forged with knowledge and tempered with strategy. Remember, though the upfront investment might be a whisper, the echo of its outcome could range between a roar and a whimper.
Related Terms
- In the Money (ITM): The polar opposites of OTM; these options start with intrinsic value. ITM for calls means asteroids above, for puts means submarines below.
- At the Money (ATM): The Goldilocks of options; not too hot, not too cold, the strike price here is just right with the market price.
- Intrinsic Value: The real McCoy for options, indicating the amount, an option is intrinsically worth.
Learn More
To dive deeper into the ocean of options trading, consider casting an eye on:
- “Options as a Strategic Investment” by Lawrence G. McMillan
- “The Options Playbook” by Brian Overby
- “Trading Options For Dummies” by Joe Duarte
Embark on your journey into the deep valleys and high mountains of options trading, armed with the map of knowledge and the walking stick of wit. May the markets be ever in your favor!
