A call or put option is OTM if its strike price is above or below the asset's current price, respectively.
Example of OTM Call:
A trader holds a Reliance Industries call option with a strike price of ₹2000, which gives him the right to buy shares of Reliance at ₹2000 on the expiry date, regardless of where the price ends on expiration.
If Reliance Industries falls to, say, ₹1500, the call option is "Out of the Money" (OTM) by ₹500 since he would prefer buying the shares at ₹1500 rather than at ₹2000 by exercising his right to buy.
Example of OTM Put:
A trader holds a Reliance Industries put option with a strike price of ₹2000, which gives him the right to sell shares of Reliance at ₹2000 on the expiry date, regardless of where the price ends on expiration.
If Reliance Industries rises to, say, ₹2500, the put option is "Out of the Money" (OTM) by ₹500 since he would prefer selling the shares at ₹2500 rather than at ₹2000 by exercising his right to sell.
In summary, an option is Out of the Money (OTM) when its strike price is not favourable compared to the current market price. Whether it’s a call or a put option, OTM means the option holder would not benefit from exercising it at that moment.
Disclaimer: This information is for educational purposes only. Trading in Futures and Options involves substantial risk and is unsuitable for all investors. Past performance is not indicative of future results. Consult a financial advisor before engaging in such trading activities.
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