Out-of-the-money (OTM)
An option is Out-of-the-money (OTM) when exercising it would produce zero or negative payoff. For a call : spot put : spot > strike. OTM options have zero intrinsic value — the entire premium is time value + IV premium. Plain-English example NIFTY sp
An option is Out-of-the-money (OTM) when exercising it would produce zero or negative payoff. For a call: spot < strike. For a put: spot > strike. OTM options have zero intrinsic value — the entire premium is time value + IV premium.
Plain-English example
NIFTY spot = 24,500. The 25,000 Call is OTM by 500 points. Its premium of ₹65 is entirely time value — if NIFTY closes at or below 25,000 on expiry, this call expires worthless and the buyer loses 100% of premium. To breakeven, NIFTY must close at 25,065 by expiry; to make 100% gain, it needs to reach ~25,130.
Why traders buy OTM
- Low absolute premium = small capital outlay per lot
- High percentage payoff if a sharp move materialises (lottery-ticket profile)
- Useful for tail-risk hedges (deep-OTM puts on index)
Why most retail OTM trades lose
Probability of OTM expiring ITM is low; theta decay accelerates near expiry; IV crush after events evaporates premium even when direction is right.
SEBI caveat
SEBI's 2023 F&O study shows the largest losses cluster in retail OTM buying on expiry day. Educational only, not a trade recommendation.