Out of the Money
In simple terms
An option that has no real value right now because the market price is moving against you. It's like holding a coupon to buy something at $100 when the store is selling it for $50—your coupon isn't worth anything until the price goes back up.
Definition
An option with no intrinsic value — calls when price is below strike, puts when above.
In depth
An option contract that has zero intrinsic value at the current market price, meaning immediate exercise would result in a loss. For call options, this occurs when the underlying asset's spot price trades below the strike price; for put options, when the spot price exceeds the strike price. Out-of-the-money options retain only time value (extrinsic value), which decays as expiration approaches. The holder may still profit if market movement brings the option into-the-money before expiration, or they may lose their entire premium if the option expires worthless.
How does Out of the Money work?
A call is out of the money when the underlying trades below its strike; a put is out of the money when it trades above. Such a contract holds no intrinsic value, so its entire premium is time value — the market's price for the chance it moves in the money before expiry. That time value decays as expiry approaches and disappears at settlement, when an out-of-the-money contract pays nothing and expires worthless. The further a strike sits from the market price, the smaller the premium and the lower the chance of any payout.
An example
Illustrative figures: with an asset trading at $1,000, a call struck at $1,300 and expiring in two weeks costs $15 per unit, so 10 units cost $150. If the settlement price is $1,250, the call is still out of the money, pays nothing, and the whole $150 is lost. Coming out ahead would require a settlement above $1,315.
Figures are illustrative only.
What beginners get wrong
- Out-of-the-money contracts look affordable, but the common outcome is expiring worthless with the full premium lost.
- A move in the anticipated direction is not sufficient; the underlying has to clear the strike plus the premium before expiry.
- Buying more contracts because each is inexpensive increases the total amount at risk rather than reducing it.
- Time value drains fastest close to expiry, so waiting out an out-of-the-money position can cost more than any later move recovers.
Related terms
Part of
How do crypto options and derivatives work? — the subject page for options and derivatives, with all 9 of its definitions in one place.
Educational only — not financial advice.