Out of the Money (OTM)
An option is out-of-the-money when exercising it would not pay off: a call with the strike above spot, or a put with the strike below spot.
OTM options have zero intrinsic value — their entire premium is time value, so they are cheaper but need the underlying to move before they pay off.
OTM options expire worthless if they stay out-of-the-money, which is why selling them is a common income strategy.
Example. With the stock at $100, a 110-strike call is out-of-the-money by $10; it expires worthless unless the stock climbs above $110.
FAQ
Can you make money on out-of-the-money options?
Yes — as a buyer if the underlying moves far enough past the strike before expiration, or as a seller by collecting premium if they expire worthless.
Why are OTM options cheaper?
They have no intrinsic value and a lower probability of finishing in-the-money, so the market prices them lower.