November 25, 2025
5 mins read
Before we get into OTM call options, we need to go over some basic terms that are used in options trading. These ideas are the basic parts that will help you understand how everything works. An option gives you the right, but not the duty, to buy or sell a stock.
Here are the important terms you should know:
Call Option: This lets you buy an asset at a certain price.
Put Option: This lets you sell an asset at a certain price.
Strike Price: This is the price you agree to buy or sell the asset at.
Expiration Date: This is the last day you can use your option.
Premium: This is the amount you pay to get an options contract.
Moneyness: This word just means whether your option is currently making money (In-the-Money), not making money (Out-of-the-Money), or at the breakeven point (At-the-Money). It depends on how the stock price compares to your strike price.
Intrinsic Value: This is the actual, measured value of an option if it were used today. The difference between the strike price and the stock price is what it is.
OTM, or Out of the Money, options are a type of option that has no intrinsic value and only has extrinsic value. To put it another way, for investors to make money with OTM options, the stock that the options are based on must move a lot in price. One reason OTM options are popular is that they are cheap to buy. Like In The Money (ITM) and At The Money (ATM) options, OTM options give investors the choice between call and put options.
If the strike price of an OTM (Out-of-the-Money) call option is higher than the stock's current market price, the option is OTM. If the option expired right now, it would be worthless, which is why it's called "out-of-the-money".
You wouldn’t use your option right away because it would cost less to buy the stock directly from the market rather than exercising the option. For an OTM call option to make money, the stock price has to go up a lot and above your strike price before the option expires.
Let's look at a simple case. Let's say that Company XYZ's shares are now selling for ₹95.
You decide to buy a call option with a strike price of ₹100 that will expire in a month. The current market price is ₹95, which is lower than the strike price of ₹100. This is an OTM call option.
If the stock price stays below ₹100, your option will be useless. But if the stock price rises to ₹110, your option is now "in-the-money," meaning it's worth a lot because you can buy the stock for ₹100 when it's trading at ₹110.
If OTM options are worthless at first, why would anyone ever buy them? That's a great question. The answer is that they are cheap and have a lot of potential to make money.
Buying an OTM option doesn't cost much, but it carries a high-risk, high-reward potential. If the stock price moves a lot in your favour before the expiration date, an OTM option could become an ITM (In-the-Money) option.
For instance, if you buy a call option for a few rupees when it is far OTM and the stock price goes up, it could be worth hundreds of rupees. Experienced traders are drawn to OTM options because they have the potential to make a lot of money.
But there is a big risk. If the stock price doesn't move enough and your option is still OTM when it expires, it loses all of its value. You lose all of the money you paid for it. That's why OTM options are a risky but potentially profitable way to trade.
Additional Read: ITM call option
Out-of-the-money call options are very popular because they have special benefits. Let's look at the strong reasons why traders should think about OTM options:
When the underlying asset moves in the same direction, OTM options can make bigger percentage gains than in-the-money and at-the-money options.
OTM options usually cost less than in-the-money or at-the-money options because they don't have any intrinsic value.
Options with a strike price that is farther away from the current market price cost less than options with a strike price that is closer to the current market price.
OTM options make it easier for traders to understand their risk profile than other strategies.
Also Read: Implied Volatility In Options
This strategy of buying OTM call options is risky but can pay off big, so it's great for traders who know what they're doing. You need to be able to predict where a stock's price might go next. The main draw is the chance to make a lot of money on a small investment. But keep in mind that if your prediction is wrong and the option expires worthless, you will lose the entire premium you paid. Don't forget to include other costs, like broking fees, when figuring out how much money you could make. These will affect your final return.
An OTM call option is one where the strike price is above the current market price. You do not have intrinsic value yet. The stock needs to move up before the option becomes worth anything.
If the stock does not cross the strike price by expiry, an OTM call expires worthless. You lose the entire premium you paid. Nothing carries forward after expiry.
Yes, buying OTM options carries real risk. The stock needs to move significantly in your favour before expiry. If it does not, you lose the full premium you put in.
Traders buy OTM calls when they expect a sharp move up but want to spend less upfront. The premium is lower than ITM options, so the risk is limited to what you paid.
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Content Partner - Dalal Street Investment Journal Wealth Advisory Private Limited
This article is for educational purposes only and should not be considered investment advice. Market investments are subject to risks. DSIJ Wealth Advisory Private Limited is a SEBI-registered Research Analyst (Reg. No: INH000006396) and Investment Adviser (Reg. No: INA000001142). Please consult your financial adviser before investing.
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